Research Insights: Why Doesn't Entry of Larger and More Productive Firms Drive Out the Many Small Firms in Developing Countries?

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Peer Reviewed icon Peer Reviewed
Date issued
Sep 2023
Subject
High-Productivity;
Business Productivity;
Competitiveness;
Labor;
Productivity;
Business Competitiveness;
Informal Credit;
Informal Firm;
Emerging Market;
Small Business;
Labor Force;
Productivity Growth;
Credit Access;
Comparative Advantage
JEL code
O10 - Economic Development: General;
D22 - Firm Behavior: Empirical Analysis;
D25 - Intertemporal Firm Choice: Investment, Capacity, and Financing;
D40 - Market Structure, Pricing, and Design: General
Country
Mexico
Category
Catalogs and Brochures
An expansion from zero to the average number of chain stores in a Mexican neighborhood (6.7) reduces the number of neighborhood shops by 15%. This reduction is not driven by increased shop exits but by decreased shop entries. Shops retain their sales of fresh products and 96% of their customers, but customers visit shops less often and spend less on non-fresh and packed goods. Shops survive by exploiting comparative advantages stemming from being small and owner-operated, such as lower agency costs, building relationships with the community, having a broader and tailored product mix, and offering informal credit.