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

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.