Cross-country comparative analysis of SMEs’ TFP in MENA region: A firm-level assessment

Abstract

This paper examines the difference in the productivity of small and large firms in a select group of countries. The countries were chosen from a wide spectrum of development levels. Belgium and Poland are from the ‘North’ and Egypt, Morocco and occupied Palestinian territory (oPt) are developing countries from the ‘South’. The analysis of total factor productivity (TFP) shows that differences in productivity between small- and medium-sized enterprises (SMEs) and large firms depend on the industry and on the country. SMEs tend to be less productive than larger firms within the same industry; it appears also that SMEs in the South tend to exhibit lower levels of productivity than in the North irrespective of the industry. Further analysis of southern countries shows that the following variables are significant in explaining the productivity differences between small and large firms: the age of the firm, the share of exports in a firm’s output, the intensity of competition within an industry and the technological intensity within an industry. The paper concludes with some recommendations for TFP improvement of Southern SMEs.

Keywords:

• total factor productivity
• Europe
• middle east
• LDCs
• SMEs

JEL Classification:

• O12
• O53
• O52

Acknowledgements

The authors are grateful to three anonymous referees and to the editor for very useful comments. They also thank Drs. Samir Abdallah Ali, Patricia Augier, Hamad Kassal and participants to the FEMISE annual conference 2013 for very useful comments on an earlier version of the paper. Mohammad Hattawy (MAS) provided research assistance for oPt.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. This review draws heavily on Syverson (2011); however, other literature was incorporated whenever necessary.

2. The sign of current training was found to be negative, however, insignificant.

3. A more detailed account of mechanisms by which competition can affect productivity can be found in Syverson (2011). Sekkat (2009) provides an overview and evidence on the relationship between competition and productivity, he also finds a positive relation.

4. This refers to improvements in productivity resulting from reallocation of resources between firms due to competition.

5. Measured by the ratio of value added to labor and capital cost.

6. The term technical efficiency (TE) is obtained using a translog production function by frontier analysis, the TE coefficient expresses a country’s efficiency as a percent of the most productive country/sector. Table 2 of Kinda et al. (2010b) shows that Egypt ranks very low among a selection of MENA countries.

7. At least from the environment within which firms operate, Belgium enjoys better infrastructure, regulatory environment, and business services and access to technology.

8. The Cobb–Douglas production function is widely used in the empirical literature for its simplicity and ease of interpretation, it also performs well using many data sets. The CES has less restrictive assumptions, however, does not perform as well.

9. Data on intermediate inputs is only available for Egypt, Morocco, and Palestine.

10. Definition adopted by the Bolton Committee in the 1971 Report on Small Firms.

11. The subscripts L and S refer to large and small, respectively.

12. The use of gross output measure to calculate TFP vis-à-vis value added measure was addressed Baptist and Hepburn (2013) among others. Their analysis suggest that the use of value added approach has two major drawbacks (using economy wide models): first, it excludes the use of intermediate inputs as an explanatory variable in constructing national productivity. Second, it requires the assumption of constant use of material inputs across time and sectors while gross output does not. The value added approach will be inappropriate if either of three conditions are met: all inputs are separable from other inputs, there is perfect competition, and there is no change in the rate of outsourcing and homogeneous technology. Using data on South Korean firms, they document a negative relation between intermediate input intensity and TFP. OECD (2001) provides a full discussion of the various methods of measuring productivity.

13. One should note here that this approach does not allow for the learning by doing phenomenon or if growth itself affects TFP. For more information on learning by doing see Chiang (2004).

14. We pointed earlier that corporate governance may be an important factor affecting firm performance; however, the lack of data does not allow the investigation of this factor.

15. The 2007 coefficient is not reported, however, positive and significant.

Additional information

Funding

This research was supported by a research grant from Palestine Economic Policy Research Institute (MAS).