How can firm-level decisions drive productivity and inclusive growth?

Research shows that gender gaps in education and employment have a negative impact on economic growth. Conversely, ensuring equal participation by women can raise productivity. In the United States, the inclusion of women and minorities in high-skill jobs accounted for 20 to 40% of aggregate growth in recent decades. 

While many employers express support for hiring women, there are barriers between intentions and actions. For example, providing facilities such as childcare opportunities and safe transportation comes with additional costs that many firms are unwilling or unable to bear. Surveys in South Asia show that when managers are reminded of these recurring costs, their willingness to hire women drops even further.

We also observe that misinformed expectations matter. When India extended paid maternity leave from 12 to 26 weeks in 2017, women’s employment fell by 30 percentage points: managers overestimated how many women would take extended leave, viewing women as costlier hires than they actually were. Such belief-driven biases contribute to the ‘motherhood penalty’ even before women become mothers. 

Constraints to female hiring can be both financial and social in nature. Saif Tirmazee (Lahore School of Economics) and Garima Sharma (Northwestern University) will build on this literature in their presentations at the conference, showing how hiring costs, social expectations, and maternity policies affect women’s employment in Pakistan and India, respectively. 

High turnover among early-career employees, especially women, suggests that job creation alone is not enough. Early-career retention is essential for developing skills; yet, job-hopping is around five times more frequent in developing countries than in wealthier ones. This is costly for both parties, as firms must repeatedly invest in recruitment and training, while workers forgo stability and income growth.

Evidence shows that retention depends on both incentives and job quality. In Ethiopian factories, many workers who were offered industrial jobs quit within months, citing poor conditions and health risks. Creating jobs is not enough: firms need to invest in structured onboarding and early-stage support. 

Shin-Yi Wang (University of Pennsylvania) will present her new study on how firms can utilize incentives and monitoring to improve worker performance and retention, adding to the conversation on what firms can do internally to build a more stable and inclusive workplace.

As firms expand, they face another friction: building cohesive and diverse teams. Hiring through personal referrals can improve retention and performance; however, such networks can also reinforce homogeneity within the team. Workers tend to refer candidates similar to themselves, which perpetuates existing imbalances. In a study in Malawi, male employees rarely referred female candidates, and female employees only referred female candidates. This kind of ‘bad homophily’ – where workers recommend people like themselves – limits diversity and, in turn, opportunity.

Inclusion is not only about who joins or stays; it also depends on how teams work once people are inside. Team composition can drive creativity and innovation, and influence how firms connect with markets, but it can also lead to conflict if not managed well. In many developing societies, identity (gender, ethnicity, or religion) shapes trust and communication. In places where caste or ethnicity divides consumers, having a more diverse sales team can expand reach. 

However, the benefits of diversity depend on the wider social context. In a Kenyan flower factory, productivity fell when ethnic tensions rose in society. Diversity enhances performance when workplaces enable employees from different backgrounds to collaborate and contribute ideas. The challenge is not only how to diversify, but also how to manage a diverse workforce.

Kartik Srivastava (Harvard University) will present evidence from referral-based hiring experiments in India, and Sampreet Goraya (Stockholm School of Economics) will examine how identity and market access influence firm diversification. Together, their work will deepen our understanding of how social networks and workplace composition affect diversity and productivity within firms.

In many places, firms don't even interact with external labor markets. A large share of firms in developing economies, ranging from small shops to major conglomerates, are family-owned and family-managed. This structure offers trust and continuity, but also creates governance frictions when leadership is based on kinship rather than competence.

Studies in the United States and Denmark found that firms where a family heir replaced a chief executive had lower productivity and profits than those that hired professional outsiders. Similar outcomes are also observed in developing economies, where family firms tend to have weaker management practices and fewer performance incentives. This pattern shows a misallocation of talent at the top, which reduces overall productivity.

However, competition can change this dynamic. Exposure to global trade and new technologies can pressure family firms to professionalize or risk decline. 

At the conference, Ananya Kotia (London School of Economics and Political Science) will shed light on how trade liberalization affected family-run firms in India, to help determine whether family firms drive or hinder inclusive growth.

From gender-biased hiring costs to worker turnover, and homogeneous teams to closed family governance, these examples illustrate how internal frictions affect firms’ ability to support inclusive development. The 2025 Firms, Trade and Development Conference at Yale University will explore these questions through new research from across developing countries. 

Register now to join us online – or view the full conference program.

This article was published in collaboration with the International Growth Centre (IGC) to set the scene for the Firms, Trade, and Development Conference 2025.