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Iacovone, Leonardo

Global Practice on Trade and Competitiveness, The World Bank

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Global Practice on Trade and Competitiveness, The World Bank

Last updated January 31, 2023

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Multi-Product Exporters : Diversification and Micro-Level Dynamics

(World Bank, Washington, DC, 2008-09) Iacovone, Leonardo ; Javorcik, Beata S.

Recent developments in trade theory, especially research on multi-product firms, have not been matched by similar progress on the empirical front. This paper aims to fill this gap by presenting a novel set of stylized facts on firm-product dynamics observed during an export boom. This exercise is possible thanks to a unique firm-product level dataset covering about 85 percent of Mexican industrial output for the period 1994-2003. The main findings are as follows. First, there is a substantial degree of product turnover at the firm-product level in response to declining trade costs. Second, "core competencies" - the fact that firms have a cost advantage or greater expertise at manufacturing some of their products - are the main driver of firms' decision to introduce or drop export products. Third, new exporters tend to "start small" in terms of both values and number of exported products. Fourth, even if the expansion in the number of exported products played a role in stimulating Mexican exports, the growth in volume of pre-existing products was the main driver of the export boom. Finally, the introduction of new export products is preceded by a surge in investment. These findings are in line with many, but not all, predictions of recent theoretical work.
Russian Volatility : Obstacle to Firm Survival and Diversification

(World Bank, Washington, DC, 2013-09) González, Alvaro S. ; Iacovone, Leonardo ; Subhash, Hari

The need for economic diversification receives a great deal of attention in Russia. This paper looks at a way to improve it that is essential but largely ignored: how to help diversifying firms better survive economic cycles. By definition, economic diversification means doing new things in new sectors and/or in new markets. The fate of emerging firms, therefore, should be of great concern to policy makers. This paper indicates that the ups and downs -- the volatility -- of Russian economic growth are key to that fate. Volatility of growth is higher in Russia than in comparable economies because its slumps are both longer and deeper. They go beyond the cleansing effects of eliminating the least efficient firms; relatively efficient ones get swept away as well. In fact, an incumbency advantage improves a firm's chances of weathering the ups and downs of the economy, regardless of a firm's relative efficiency. Finally, firms in sectors where competition is less intense are less likely to exit the market, regardless of their relative efficiency. Two policy conclusions emerge from these findings -- one macroeconomic and one microeconomic. First, the importance of countercyclical policies is heightened to include efficiency elements. Second, strengthening competition and other factors that support the survival of new, emerging and efficient firms will promote economic diversification. Efforts to help small and medium enterprises may be better spent on removing the obstacles that young, infant firms face as they attempt to enter, survive and grow.
Trade and Innovation in Services : Evidence from a Developing Economy

(World Bank, Washington, DC, 2013-06) Iacovone, Leonardo ; Mattoo, Aaditya ; Zahler, Andrés

Studies on innovation and international trade have traditionally focused on manufacturing because neither was seen as important for services. Moreover, the few existing studies on services focus only on industrial countries, although in many developing countries services are already the largest sector in the economy and an important determinant of overall productivity growth. Using a recent firm-level innovation survey for Chile to compare the manufacturing and "tradable" services sector, this paper reveals some novel patterns. First, although services firms have on average a much lower propensity to export than manufacturing firms, services exports are less dominated by large firms and tend to be more skill intensive than manufacturing exports. Second, services firms appear to be as innovative as -- and in some cases more innovative than -- manufacturing firms, in terms of both inputs and outputs of "technological" innovative activity, although services innovations more often take a "non-technological" form. Third, services exporters (like manufacturing exporters) tend to be significantly more innovative than non-exporters, with a wider gap for innovations close to the global technological frontier. These findings suggest that the growing faith in services as a source of both trade and innovative dynamism may not be misplaced.
Stunted Growth : Why Don't African Firms Create More Jobs?

(World Bank, Washington, DC, 2013-12) Iacovone, Leonardo ; Ramachandran, Vijaya ; Schmidt, Martin

Many countries in Africa suffer high rates of underemployment or low rates of productive employment; many also anticipate large numbers of people to enter the workforce in the near future. This paper asks the question: Are African firms creating fewer jobs than those located elsewhere? And, if so, why? One reason may be that weak business environments slow the growth of firms and distort the allocation of resources away from better-performing firms, hence reducing their potential for job creation. The paper uses data from 41,000 firms across 119 countries to examine the drivers of firm growth, with a special focus on African firms. African firms, at any age, tend to be 20-24 percent smaller than firms in other regions of the world. The poor business environment, driven by limited access to finance, and the lack of availability of electricity, land, and unskilled labor have some value in explaining this difference. Foreign ownership, the export status of the firm, and the size of the market are also significant determinants of firm size. However, even after controlling for the business environment and for characteristics of firms and markets, about 60 percent of the size gap between African and non-African firms remains unexplained.
Regional Productivity Convergence in Peru

(World Bank, Washington, DC, 2015-11) Iacovone, Leonardo ; Sanchez-Bayardo, Luis F. ; Sharma, Siddharth

This paper examines whether labor productivity converged across Peru’s regions (“departments”) during 2002-12. Given the large differences in labor productivity across the regions of Peru, such convergence has the potential to raise aggregate productivity and incomes, and also reduce regional inequalities. The paper finds that labor productivity in the secondary sector (especially manufacturing) and the mining sector has converged across Peruvian departments. The paper does not find robust evidence for labor productivity convergence in agriculture and services. These patterns are consistent with recent cross-country evidence and with the hypothesis that productivity convergence is more likely in sectors with greater scope for market integration, because of the effects of competition and knowledge flows. The convergence in labor productivity within manufacturing and mining has been sufficient to lead to convergence in aggregate labor productivity across departments. But because services and agriculture continue to employ the majority of workers in Peru, aggregate convergence is slower than that within manufacturing. The paper also finds that poverty rates are not converging across departments. The limited impact of labor productivity convergence on poverty could be tied to the facts that not all sectors are experiencing productivity convergence, poorer people are employed in sectors where convergence has been slower (such as agriculture), and there is very little labor reallocation toward converging sectors (such as manufacturing).
Trade Integration, FDI, and Productivity

(World Bank, Jakarta, 2015-04) Javorcik, Beata ; Iacovone, Leonardo ; Fitrani, Fitria

Policy attitude towards trade integration and foreign direct investment (FDI) is often a controversial yet popular subject. This note presents evidences from recent policy researches that arguing that engaging in an open trade and investment regime have brought productivity gains which is key factor for sustaining increase in income per-capita. Evidence from Indonesia also suggests that foreign owned plants have become increasingly important, generating a significant share of exports and overall output, as well as more productive and more export intensive than domestic plants, and to spend more on RD and training. FDI also have positive impact on firms in the same sector, through competition and demonstration effects, and in upstream sectors, as suppliers to foreign-owned plants improve the quality of their own products to meet their clients more exacting needs. Evidence also suggests a positive impact from import competition in improving allocative efficiency across manufacturing plants which is a key element in driving productivity in manufacturing sector.
Spatial Gaps in Management Quality: Evidence from a Lagging Region in Croatia

(World Bank, Washington, DC, 2020-04) Grover, Arti ; Iacovone, Leonardo ; Chakraborty, Pavel

Embedding management and operational practices survey in a broader firm capabilities survey, this report finds that: (i) relative to the rest of Croatia, an average firm in the lagging region of the country (Eastern Croatia) is only slightly behind in the adoption of structured management practices. Nevertheless, overall, Croatia is farther from a frontier economy such as the United States. (ii) There is wide heterogeneity in adoption of management practices in the country, such that a large share of firms in the lagging region are badly managed relative to those in the rest of the country. (iii) Better managed firms in all regions, including Eastern Croatia, show superior firm performance. What drives better management? Global linkages matter for firms in other countries and in all regions of Croatia except the lagging region. Unlike other countries, firms in Croatia do not upgrade management quality as they age, perhaps due to lack of pro-competitive forces. This report recommends focusing on policies that improve allocative efficiency in the region and help firms establish global linkages, and more direct intervention for improving the management quality of firms.
The DR-CAFTA and the Extensive Margin : A Firm-level Analysis

( 2010-06-01) Molina, Ana Cristina ; Bussolo, Maurizio ; Iacovone, Leonardo

This paper examines the export behavior of Dominican Republic exporters following the implementation of the Dominican Republic-Central America Free Trade Agreement in 2007. Using a firm-level dataset for 2002-2009, the authors investigate the effects of a tariff reduction on the extensive margin. The analysis distinguishes the impact on the entry of new firms, exports of new products, and entry into the Agreement s markets. The paper analyzes whether the agreement prevents incumbent exporters from exiting the market. The results suggest that tariff cuts had a positive although very small effect on the extensive margin. A decline in tariffs also seems to reduce the probability of exit, but the effect is also small. The evidence calls for complementary policies aiming at helping exporters maximize the benefits of the agreement.
Productivity Growth in Mexico: Understanding Main Dynamics and Key Drivers

(World Bank, Washington, DC, 2022) Iacovone, Leonardo ; Munoz Moreno, Rafael ; Olaberria, Eduardo ; Pereira Lopez, Mariana De La Paz

The report undertakes, for the first time, a comprehensive firm-level analysis of the entire Mexican economy over 25 years, relying on the last six rounds of the Economic Census, which were conducted between 1994 and 2019 and surveyed more than 20 million businesses. It finds that Mexico’s disappointing aggregate productivity masks large differences in productivity levels and growth across locations, sectors, and firms. A geographic productivity divide runs between the North-Center and South of Mexico, but large differences also persist between municipalities within regions. Fast-growing municipalities that have caught up to the Mexican productivity frontier, including in the South, while others have failed to grow at all. There is also a divide between modern firms, with access to finance and strong management, integrated into global value chains (GVCs), and more traditional firms characterized by limited access to finance and weak capabilities, unable to benefit from Mexico’s regional and global integration. The report shows that Mexico’s aggregate productivity is weakened by structural factors at industry and firm level — access to finance, lack of incentives to invest in technology, managerial capacities, and the business environment — that impede productive firms’ access to resources. The rest of this summary gives a synopsis of the report’s main findings and recommendations.
The Impact of the COVID-19 Pandemic on Women-Led Businesses

(World Bank, Washington, DC, 2021-10) Torres, Jesica ; Maduko, Franklin ; Gaddis, Isis ; Iacovone, Leonardo ; Beegle, Kathleen

The COVID-19 pandemic has struck businesses across the globe with unprecedented impacts. The world economy has been hit hard and firms have experienced a myriad of challenges, but these challenges have been heterogeneous across firms. This paper examines one important dimension of this heterogeneity: the differential effect of the pandemic on women-led and men-led businesses. The paper exploits a unique sample of close to 40,000 mainly formal businesses from 49 countries covering the months between April and September 2020. The findings show that women-led micro-businesses, women-led businesses in the hospitality industry, and women-led businesses in countries more severely affected by the COVID-19 shock were disproportionately hit compared with businesses led by men. At the same time, women-led micro-firms were markedly more likely to report increasing the use of digital platforms, but less likely to invest in software, equipment, or digital solutions. Finally, the findings also show that women-led businesses were less likely to have received some form of public support although they have been hit harder in some domains. In a crisis of the magnitude of the COVID-19 pandemic, evidence tracing the impact of the shock in a timely fashion is desperately needed to help inform the design of policy interventions. This real-time glimpse into women-led businesses fills this need for robust and policy-relevant evidence, and due to the large country coverage of the data, it is possible to identify patterns that extend beyond any one country, region, or sector, but at the cost of some granularity for testing more complex economic theories.