Presenter: Vittorio Bassi.
Technology is often embodied in indivisible capital goods, such as production machines. As a result, the small scale of firms in developing countries could hinder investment and productivity. This paper finds that this concern is less important than previously thought. We design and implement a novel survey to measure production processes in over 1,000 manufacturing firms in three prominent sectors in urban Uganda. We document that in carpentry – a sector with small firms and high fixed costs – an active inter-firm rental market for machines has emerged, allowing firms to collectively achieve economies of scale. Interpreted through the lenses of an equilibrium model of firm behavior, our data reveal that the existing rental market limits by 55% the productivity losses due to the small scale of production of individual firms. Our results imply that the design of effective development policies should take into account market-level interactions between firms as a powerful means to foster technology adoption and mitigate the costs of small scale.