New research on Firms, Trade, and Development

By Atl Castro Asmussen
November 30, 2023

Conference participants eating lunch and talking
Participants at the Firms, Trade, and Development Conference eating lunch in the new event space in the Tobin Building, Yale University.

How do interactions between markets and firms affect economic growth? Do policymakers face trade-offs in pursuing sustainable growth in underdeveloped markets? Are there empirically grounded strategies for resolving market frictions in these nations?

These questions formed the focus of this year's Firms, Trade, and Development Conference. The event was a collaboration between the EGC and the International Growth Centre at LSE. At Yale, conference organizers included Penny Goldberg (Elihu Professor of Economics and Global Affairs at Yale University and an Affiliate of EGC), Amit Khandelwal (Hahn Professor of Global Affairs and Economics at Yale University), Lauren Falcao Bergquist (Assistant Professor of Economics and Global Affairs at Yale University), and Mayara Felix (Cowles Foundation Postdoctoral Associate). Additional members of the Organizing Committee included David Atkin (Professor of Economics at MIT), Namrata Kala (Associate Professor in Applied Economics at MIT), Isabela Manelici (Assistant Professor of Economics at LSE), Meredith Startz (Assistant Professor of Economics at Dartmouth College), Eric Verhoogen (Professor of Economics at Columbia University), and Chris Woodruff (Professor of Development Economics at Oxford University).

In a piece for the EGC, postdoctoral associate Sagar Saxena and London School of Economics and Political Science (LSE) Research Coordinator Rahul Shukla delved into present scholarship to begin to answer these questions. A common thread in the literature is that policymakers in LMICs face the challenge of solving market and trade frictions, while at the same time having to chart growth paths that are environmentally sustainable.

On October 19, speakers and members of the global community working on firms, markets, trade, institutions, and development in low- and middle-income countries converged on Yale's and the London School of Economics’ respective campuses to engage with these questions over two days. Presentations occurred jointly at Yale and LSE and were live-streamed so participants at both locations could tune in and field questions. Over 149 participants from 38 countries joined virtually, with 52 in-person participants at EGC and 29 at IGC.

Watch the #FirmsTradeDev 2023 Keynote

Robin Burgess opened the 2023 Firms, Trade & Development conference with a keynote presentation on "Job variety, firms, and development". He spoke at London School of Economics with a live simulcast at Yale.

Thursday, October 19: Understanding the market forces that accelerate growth in LMICs

Presentations on Day 1 centered on understanding how market dynamics affect growth in LMICs—from understanding how state capacity in resolving disputes affects credit access, to how market-wide employment opportunities for women workers affect their bargaining power within firms, to firm-level incentives to adapt new, productive technologies.

Robin Burgess delivered the keynote presentation for this year’s conference. He presented new descriptive evidence linking economic growth to the variety of jobs available in a country. The nature of evidence was both across countries and within countries. In particular, he showed that in lower-income settings, a small number of job "titles" employ a majority of the workforce, while in higher-income settings, employment is spread out over a much larger range of job titles. He also showed that the number of job titles is positively associated with the prevalence of salaried/paid work and the presence of larger firms.

We really want to begin to understand what has been the role of the firm in driving job variety and [whether] that [increase in job variety is coming from forces] within firms or is it because other firms are coming in?

For too long, a lot of development economics [has focused] on making very very poor people slightly less poor...maybe we want to be a little bit more ambitious.

– Robin Burgess, Professor of Economics at the London School of Economics and Political Science and Co-Founder and Director of the International Growth Centre

Other presentations focused on the origins of market frictions. Manaswini Rao, for instance, explored how court backlogs in India limit economic growth by freezing investable assets in litigation. Resulting inefficiencies in resource allocation can be mitigated by increasing the Indian judiciary’s capacity to resolve disputes quickly. Rao concludes that investment in India’s judicial capacities can provide tax revenue and economic gains 6 and 30 times higher, respectively, than the cost of hiring an additional judge.

“The judicial sector is usually not looked at as important to economic development [when] vacancies in these core institutions have a large implication on the economy” 

Manaswini Rao                                                       

Assistant Professor of Economics at the Alfred Lerner College of Business and Economics at the University of Delaware


Philipp Barteska continued on the topic of state capacity by exploring how “good” bureaucrats helped realize the objectives of South Korean export policies. Using data from the late 1960s to the early 2000s, Barteska found heterogeneous effects of bureaucratic office expansions affected exports. A critical insight is that placing the “good” bureaucrats in key positions matters for economic growth and industrial policy. Moving up bureaucrat ability from the 20th percentile to the 50th percentile increases exports by about 40%.

The effect of experience is interesting because it highlights a potentially novel channel to assess import effects

– Philipp Barteska

PhD Candidate at the Department of Economics at the London School of Economics and Political Science

Tristan Reed presented work exploring the returns to private equity investments in developing countries over a 70-year period. Specifically, Reed studies the complete global portfolio of equity investments made by the International Finance Corporation (IFC) since its founding in 1956 and finds that returns to private equity in developing countries are comparable to or higher than benchmarks like the S&P 500. The results also suggest that barriers and information costs restrict capital flows to developing countries, lending support to the "Lucas puzzle."

Differences [in returns] due to capital market integration are bigger than those associated with GDP growth

– Tristan Reed

Applied Economist at the World Bank's Development Research Group

Garima Sharma traced the origins of the gender gap in wages in LMICs by investigating Brazil’s textile manufacturing sector. Sharma finds that the firms that provide benefits and amenities for women, such as maternity leave and flexibility in childcare, can pay women lower wages than men while retaining women employees. Giving women sufficient employment options to minimize this monopsony power of firms can allow them to earn a wage proportionate to their productivity.

Finally, Martin Rotemberg shared insights on the delayed acceptance of steam power in 19th-century manufacturing, a perplexing development since technological innovations typically encourage economic growth. Rotemberg finds that path dependence at the firm level contributes to the adoption of new technologies. This insight might apply to LMICs by suggesting that limited access to vital natural resources reduces the capacity for market entry.

We find that entrants, particularly in counties with poor access to waterpower, drove the adoption of steam power, consistent with high switching costs

Martin Rotemberg                                                   

Assistant Professor of Economics at New York University


The theme of the presentations for Day 1 culminated in emphasizing how markets and firms contribute to economic development in the context of LMICs, which have historically received little attention compared with their wealthier counterparts.

Conference participant asking a question during the Q&A
Conference participant asking a question during the Q&A.

Friday, October 20: The causes of and policy responses to resource misallocation in LMICs

Presentations on Day 2 expanded on themes from Day 1, focusing on the experience of firms in LMICs. Most presentations pinpointed the welfare effects of resource misallocation caused by market distortions.

Dave Donaldson assessed the costs of production misallocations from market distortions, such as corruption and incomplete contracts, for firms in LMICs. Donaldson discussed how identifying misallocation from data without strong functional form assumptions is usually difficult and presented a new framework to infer the efficiency of market allocations under weaker assumptions. He implements the framework using data from procurement lotteries in Ecuador that provide quasi-experimental variation (i.e., who wins is exogenous) to determine the extent of misallocation in the construction sector. The findings suggest that the total cost of misallocation in this sector is just 1.6% – considerably smaller than typical existing estimates.

Jeremy Majerovitz presented a very related paper that also developed a new approach to measure the cost of misallocation in a market under weaker assumptions than earlier papers. This methodology is based on the clever insight that the cost of misallocation can be expressed as a function of the variance of the log marginal revenue product of capital (MRPK) across firms, i.e. the revenue generated by introducing one additional unit of resources to the firm. Majerovitz estimates this variance using data from a randomized controlled trial (RCT) that gave capital grants to microenterprises in Sri Lanka, and finds that optimally reallocating all inputs would increase output substantially.  

We showed how to measure misallocation without auxiliary assumptions
– Jeremy Majerovitz

Associate Economist at the Federal Reserve Bank of St. Louis

Following Majerovitz’s presentation, a group of prominent policymakers convened for a “Policymaker Panel Session on Fostering Growth in Developing Countries”, presented at LSE and virtually.The discussion focused on sustainable growth amidst climate change, financial inclusion, and gender equity. 

Adnan Khan opened the discussion by observing that most policymakers and researchers look at economic growth in LMICs negatively but must recognize that it is necessary to fulfill the goals of financial equity. “Don’t put zero weight on growth…even in order to achieve the other objective of inclusion, we need to have growth.”

Dean Karlan countered and expanded on Khan’s insights by explaining that most growth does not have the intent for inclusion.“Growth is great, but think about the type of growth we are going to be experiencing…our productivity for labor is going way up with technology…we can do something about growth’s inclusivity [but] at the investment level, there’s not much attention on the intentionality issue.” 

 Liz Lloyd discussed the efforts of the British International Investment towards financial inclusion, both generally for LMICs and for specific groups, such as women.“We want more economic opportunities for women, and we’re trying to do research right now about understanding the relationship between senior leadership and firm behavior.”

  • “Policymaker Panel Session on Fostering Growth in Developing Countries”, presented at LSE
  • Discussants: Dean Karlan (U.S. Agency for international Development), Liz Lloyd (British International Investment), and Adnan Khan (Foreign, Commonwealth and Development Office)


Godfrey Kamutando went one step further by asking whether misallocation is a concern in informal sectors, an understudied sector in the allocation economics literature. Using Zimbabwe as an empirical case study, where the informal sector accounts for 61% of GDP, Kamutando finds that failing to account for informal firms can bias estimates of resource misallocation.

•    “Allocative efficiency between and within the formal and informal manufacturing sectors in Zimbabwe”, presented virtually
•    Authors: Godfrey Kamutando, Lawrence Edwards
•    Speaker: Godfrey Kamutando (University of Cape Town) 

Rikhia Bhukta asked whether financial inclusion reduces welfare disparities resulting from caste-based social exclusion. Bhukta found that though Indian castes are less rigid than ever, caste-based wage discrimination and differential access to credit remain steep obstacles for individuals of lower castes. She provides a promising solution: bank expansion policies, which enhance access to formal financial services across all caste categories and promote financial inclusion.

Miguel Angel Talamas Marcos conducted a neighborhood-level analysis to explain how microenterprises respond to competition to convenience chain store entry. Focusing on Mexico, Marcos found that the arrival of chain stores in Mexican neighborhoods reduced the entry of tienditas, or small, local Mexican shops. The remaining tienditas adapted by offering greater product variety. They also survived because of the comparative advantages of local ownership and small size, a relevant insight for LMICs contexts as these tienditas were cash and credit-constrained. 

•    “Surviving Competition: Neighborhood Shops vs. Convenience Chains”, presented at Yale
•    Author: Miguel Angel Talamas Marcos
•    Speaker: Miguel Angel Talamas Marcos (Inter-American Development Bank and Kellogg School of Management) 

Isabela Manelici presented a framework to quantify the welfare effects of foreign multinational enterprises (MNEs) operating in an economy with distortions, using Mexico as a case study. The paper presented evidence of extensive heterogeneity in distortions (e.g., taxes, regulations, crime) across different types of establishments and locations in Mexico. Manelici found that increased foreign MNE employment in a location benefits the local formal sector but leaves the informal sector largely unaffected. Specifically, more foreign MNEs are associated with more domestic formal sector establishments, workers, sales, etc.  

  • "The Gains from Foreign Multinationals in an Economy with Distortions", presented at LSE
  • Authors: Isabela Manelici, Jose P. Vasquez, Román D. Zárate
  • Speaker: Isabela Manelici (LSE)

Watch the #FirmsTradeDev 2023 Policy panel

A discussion of "Fostering Growth in Developing Countries" featuring Dean Karlan (Northwestern University, USAID), Adnan Khan (FCDO), Liz Lloyd (BII) and Christopher Woodruff (Oxford) took place at London School of Economics with a live simulcast at Yale.

A group speaking during a conference break

Academic Committee members Eric Verhoogen (L) of Columbia University and Namrata Kala (R) of MIT Sloan, and conference co-organizer Penny Goldberg (center) speak with conference participants.  

Interdisciplinary insights and the path to inclusive growth

Amit Khandelwal speaking
Amit Khandelwal closes Firms, Trade & Development 2023.

The 2023 Firms, Trade, and Development Conference has occurred annually for 14 years. Now a hub for the international development economics community, it provides pertinent insights that can help shape academics’ and policymakers’ understandings of economic development in LMICs. This year’s conference offered the ideal catalyst for the launch of EGC’s Markets and Development Initiative, which hopes to combine insights from the fields of international trade, development economics, and industrial organization. It will also provide a new space for researchers to research some of the very questions that guided this year’s conference. Amit Khandelwal, who co-organized the conference, ended the conference by emphasizing how the new initiative will build on the conference’s presentations and carve out a space for novel insights. 

This conference came about many years ago as a way for researchers interested in firms, trade and economic development to convene. The types of papers at this conference, and the ones that we want to showcase more prominently through the EGC Markets Initiative, combine a range of methods from across economics — tools from international trade, development economics, and industrial organization. But while the tools are diverse, the sets of questions all center around understanding the role of markets and firms for low-income countries. It was exciting to host the conference this year with the IGC as a way to launch the new EGC Markets Initiative, and we are excited to build on this start.
– Amit Khandelwal
Hahn Professor of Global Affairs and Economics at Yale University

EGC thanks the organizers, presenters, and participants in the Firms, Trade, and Development Conference, including our colleagues at the IGC. Special thanks to Sagar Saxena for his insightful contributions to this article. Photos by Vestal McIntyre for EGC.