Large Firms are Generally a Force for Good, Especially in Developing Countries.
Improving Development Impact.
Most investors and many other people see companies as society’s leaders in innovation and social progress. The number of positive innovations provided by companies to society from healthcare and energy to transport and education are innumerable. Yet many companies, and large ones in particular, are often unpopular for a variety of reasons. This may be especially true in developing countries where large companies are often foreign and are often viewed as extractive.
However World Bank research challenges this perspective. In a publication titled Making It Big, Andrea Ciani and he colleagues present the results of a survey of large firms operating across 32 developing countries. The results show that nearly 60% of large firms are also the most productive in their sector and in their country across low and middle-income countries alike.
This productivity also translates into benefits for their stakeholders, notably their employees, suppliers, and owners. For example, the chart below shows that on average employees of large companies report 22 percent higher hourly wages.
But the developmental benefits don’t stop there:
“Large firms create demand in their supply chains, grow markets of previously unavailable products and services, generate surpluses that can improve workers’ income and employment conditions, and generate know-how in ways that benefit other companies of all sizes.” (Ciani, A., Hyland, MC., Karalashvili, N., Keller, JL., Ragoussis, A., Thu Tran, T. 2020.)
Large firms may also have a disproportionately positive benefit for the quality of economic income earned by developing countries. Most developing countries have small open economies, which must be funded either through export earnings, donations, or borrowing, the first of which is generally healthier than the others. However, many small countries struggle to develop their export sectors due to technology and skills gaps when competing in competitive global markets.
Here a 2020 World Bank Economic Review publication by Caroline Freund and Martha Pierola suggests that export growth tends to be enabled more by large firms rather than small ones. The chart below shows that large firms account for one-third of exports, and export diversification across a sample of 32 developing countries. These firms also account for 47% of export growth.
But why does this matter? It matters because these findings talk directly about the valuable role that large companies can play in improving the state of the world, and probably warrant an objective and disciplined analysis of their potential benefits among investors, development finance practitioners, and policymakers alike.
References:
1. Ciani, A., Hyland, MC., Karalashvili, N., Keller, JL., Ragoussis, A., Thu Tran, T. (2020): “Making it Big: Why Developing Countries Need More Large Firms.” World Bank Group.
2. Freund, C and Pierola, M. (2020): “The Origins and Dynamics of Export Superstars.” The World Bank Economic Review, 34(1), 2020, 28–47. Oxford University Press, Oxford, p28.
