Iacovone, Leonardo

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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.
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.
Organizing Knowledge to Compete: Impacts of Capacity Building Programs on Firm Organization

(World Bank, Washington, DC, 2016-04) Cruz, Marcio ; Bussolo, Maurizio ; Iacovone, Leonardo

A growing literature aiming at explaining differences across firms in productivity and access to global export markets has focused on the internal organization of firms. This paper contributes to this literature by evaluating the impact of a program that focuses on enhancing competitiveness of small and medium enterprises in Brazil by providing coaching and consulting on management and production practices. Specifically, the paper tests whether the program induces treated firms to reorganize knowledge by adding more layers of different skills and competencies to their workforces. Using a unique firm-level dataset, the number of layers of the firms are compared before and after the program. The impact of the program is identified by relying on an instrumental variable approach, exploiting the quasi-experiment roll-out of its implementation, which was carried out at different times across Brazilian regions. The analysis finds that the program had an effect and that this effect is heterogeneous. The program is particularly effective in promoting the reorganization of firms with initially fewer layers. The results confirm another finding of the literature, namely that in re-organized firms inequality of wages increases, as firms pay higher wages in added higher layers than in pre-existing ones. Finally, these results are used to discuss how the change in firms' organization is positively correlated with export performance.
Opportunity versus Necessity: Understanding the Heterogeneity of Female Micro-Entrepreneurs

(World Bank, Washington, DC, 2016-04) Calderon, Gabriela ; Iacovone, Leonardo ; Juarez, Laura

Entrepreneurs that voluntarily choose to start a business because they are able to identify a good business opportunity and act on it -- opportunity entrepreneurs -- might be different along various dimensions from those who are forced to become entrepreneurs because of lack of other alternatives -- necessity entrepreneurs. To provide evidence on these differences, this paper exploits a unique data set covering a wide array of characteristics, including cognitive skills, non-cognitive skills and managerial practices, for a large sample of female entrepreneurs in Mexico. Descriptive results show that on average opportunity entrepreneurs have better performance and higher skills than necessity entrepreneurs. A discriminant analysis reveals that discrimination is difficult to achieve based on these observables, which suggests the existence of unobservables driving both the decision to become an opportunity entrepreneur and performance. Thus, an instrumental variables estimation is conducted, using state economic growth in the year the business was set up as an instrument for opportunity, to confirm that opportunity entrepreneurs have higher performance and better management practices.
Shortening Supply Chains: Experimental Evidence from Fruit and Vegetable Vendors in Bogota

(World Bank, Washington, DC, 2019-08) Iacovone, Leonardo ; McKenzie, David

Small trading activities are a prevalent form of self-employment in developing countries, but their integration into supply value chains is not efficient, especially when it comes to perishable produce. This study tests a novel approach to improve their efficiency by reducing the time and cost of sourcing produce by aggregating purchases through the use of an app and centralized distribution system. Fruit and vegetable vendors in Bogotá currently travel most days to a central market to purchase produce, incurring substantial time and monetary costs. A social enterprise attempted to shorten the supply chain between farmers and vendors by aggregating orders from many small stores, sourcing directly from farmers, and delivering them to the stores. The introduction of this new service was randomized at the market block level. Initial interest was high and offering the service reduced travel time for users by almost two hours a week, reduced travel costs, and increased work-life balance for store owners. Firms offered the service saved an average of 6 to 8 percent on purchase costs, and although some of this passed through into lower prices for consumers, there was incomplete pass-through, so that markups rose. However, stores reduced their sales of products that were not originally offered by this new service, and their total sales and profits appear to have fallen in the short run, with service usage falling over time. The results highlight the potential for new technologies to solve firm coordination problems, offer a window into the nature of competition among small retailers, and point to the challenges in achieving economies of scale when disrupting centralized markets for multi-product firms.
Too Much Energy: The Perverse Effect of Low Fuel Prices on Firms

(World Bank, Washington, DC, 2019-10) Cali, Massimiliano ; Cantore, Nicola ; Iacovone, Leonardo ; Pereira-Lopez, Mariana ; Presidente, Giorgio

This paper provides novel evidence on the impact of changes in energy prices on manufacturing performance in two large developing economies -- Indonesia and Mexico. It finds that unlike increases in electricity prices, which harm plants' performance, fuel price hikes result in higher productivity and profits of manufacturing plants. The results of instrumental variable estimation imply that a 10 percent increase in fuel prices would lead to a 3.3 percent increase in total factor productivity for Indonesian and 1.2 percent for Mexican plants. The evidence suggests that effects are driven by the incentives that fuel price increases provide to plants towards replacing inefficient fuel-powered with more productive electricity-powered capital equipment. These results help to re-evaluate the policy trade-off between reducing carbon emissions and improving economic performance, particularly in countries with large fuel subsidies such as Indonesia and Mexico.
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.
Improving Management with Individual and Group-Based Consulting: Results from a Randomized Experiment in Colombia

(World Bank, Washington, DC, 2019-05) Iacovone, Leonardo ; Maloney, William ; McKenzie, David

Differences in management quality are an important contributor to productivity differences across countries. A key question is how to best improve poor management in developing countries. This paper tests two different approaches to improving management in Colombian auto parts firms. The first uses intensive and expensive one-on-one consulting, while the second draws on agricultural extension approaches to provide consulting to small groups of firms at approximately one-third of the cost of the individual approach. Both approaches lead to improvements in management practices of a similar magnitude (8-10 percentage points), so that the new group-based approach dominates on a cost-benefit basis. Moreover, the paper finds some evidence that the group-based intervention led to increases in firm size over the next three years, while the impacts on firm outcomes are smaller and statistically insignificant for the individual consulting. The results point to the potential of group-based approaches as a pathway to scaling up management improvements.
Cartels, Antitrust Enforcement, and Industry Performance: Evidence from Mexico

(World Bank, Washington, DC, 2022-12) Reed, Tristan ; Pereira López, Mariana ; Urrutia Arrieta, Ana ; Iacovone, Leonardo

Forty percent of economic activities in Mexico weighed by sales have been investigated for illegal monopolistic practices since the Federal Competition Commission was established in 1993. By exploiting some unique features of the Mexican investigative system, and using a synthetic control approach, this paper examines the causal impact of antitrust sanctions on industry performance and aggregate outcomes. Sanctions cause sales and wages to increase and profit margins to fall in the sanctioned sectors, thus benefiting consumers and workers. Overall, antitrust enforcement contributes roughly half a percent of per capita gross domestic product growth. Outcomes of investigations that are closed without sanction fail to reject the hypothesis that some harmful conduct is not sanctioned because investigators lack resources to prove it conclusively. An implication is that the Commission could generate greater benefits with additional investigative resources.
Economic Performance under NAFTA : A Firm-Level Analysis of the Trade-Productivity Linkages

( 2011-05-01) De Hoyos, Rafael E. ; Iacovone, Leonardo

Did the North American Free Trade Agreement make Mexican firms more productive? If so, through which channels? This paper addresses these questions by deploying an innovative microeconometric approach that disentangles the various channels through which integration with the global markets (via international trade) can affect firm-level productivity. The results show that the North American Free Trade Agreement stimulated the productivity of Mexican plants via: (1) an increase in import competition and (2) a positive effect on access to imported intermediate inputs. However, the impact of trade reforms was not identical for all integrated firms, with fully integrated firms (i.e. firms simultaneously exporting and importing) benefiting more than other integrated firms. Contrary to previous results, once self-selection problems are solved, the analysis finds a rather weak relationship between exports and productivity growth.