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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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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.
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.
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.
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.
Determinants of Market Integration and Price Transmission in Indonesia

(World Bank, Washington, DC, 2012-06) Varela, Gonzalo ; Aldaz-Carroll, Enrique ; Iacovone, Leonardo

This paper investigates the determinants of price differences and market integration among Indonesian provinces, using data from retail cooking oil, rice and sugar markets during the period 1993-2007, and from wholesale maize and soybean markets during the period 1992-2006. The authors measure the degree of integration using co-integration techniques, and calculate average price differences. They use regression analysis to understand the drivers of price differences and market integration. For rice and sugar, they find wide market integration and low price differences, in the range of 5-12 percent. For maize, soybeans and cooking oil, they find less integration and higher price differences (16-22 percent). Integration across provinces is explained by the remoteness and quality of transport infrastructure of a province. Price differences across provinces respond to differences in provincial characteristics such as remoteness, transport infrastructure, output of the commodity, land productivity and income per capita.
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.
Financing Small and Medium Enterprises in the Republic of South Africa

(World Bank, Washington, DC, 2011) Fuchs, Michael ; Iacovone, Leonardo ; Jaeggi, Thomas ; Napier, Mark ; Pearson, Roland ; Pellegrini, Giulia ; Villegas Sanchez, Carolina

Numerous studies worldwide have highlighted the important contribution made by small and medium-sized enterprises (SMEs) to employment, income and economic growth. In a study of 76 developed and developing economies, Ayyagari and others (2007) found that SMEs account for more than 60 percent of total manufacturing employment and that SMEs contributed significant proportions of Gross Domestic Product (GDP). SME growth requires external financing, but constraints to accessing credit, consistently rated as some of the greatest barriers to the operation and growth of firms, affect SMEs more severely than large firms (Beck and Demirguc-Kunt 2006; Beck and others 2006). The purposes of this report are to: a) analyze the availability of bank finance to SMEs in South Africa and how availability might be enhanced in the context of the economic downturn; and b) offer concrete policy recommendations on how to lessen obstacles to bank SME financing and reduce the negative effects of the economic downturn (or of a similar downturn in future) on access to finance. The report is structured in 5 sections: section two provides a short overview of existing studies and data on SME finance in South Africa. Section three presents the main results of the surveys. Section four provides policy considerations. Section five concludes.
ICT Use, Competitive Pressures and Firm Performance in Mexico

(World Bank, Washington, DC, 2016-04) Iacovone, Leonardo ; Pereira-Lopez, Mariana ; Schiffbauer, Marc

This paper presents a set of stylized facts on the relation between information and communications technology (ICT) use, firm performance, and competition. Taking advantage of a novel firm-level data set on information and communications technology for Mexico, the study finds that firms facing higher competition appear to have more incentives to increase their use of information and communications technology. Accordingly, although there is indeed a positive relation between information and communications technology use and firm performance, this effect is greater for firms that face higher competition pressures, which is consistent with the theoretical predictions of the trade-induced technical change hypothesis.
Competition Makes IT Better: Evidence on When Firms Use IT More Effectively

(World Bank, Washington, DC, 2016-04) Iacovone, Leonardo ; Pereira-Lopez, Mariana ; Schiffbauer, Marc

This paper uses a unique firm-level data set for Mexico, with information never used for research before, to assess how use of information technology (IT henceforth) influences firm performance. Further, the paper explores if, in the context of increasing competition from China, this effect is different for firms more strongly affected by competition where incentives for upgrading and innovation may be more intense. In this perspective, the paper analyzes the complementarity between IT and other changes spurred by competition, taking advantage of the exogenous shock generated by Chinese competition. The results indicate that IT use has higher effects over productivity in the case of firms facing higher competition from China, in the domestic market and in the U.S. market. Furthermore, the paper shows how these changes appear to be driven by complementary investments in innovation and organizational changes.