PRINCETON – When researchers at the McKinsey Global Institute (MGI) recently dug into the details of Mexico’s lagging economic performance, they made a remarkable discovery: an unexpectedly large gap in productivity growth between large and small firms. From 1999 to 2009, labor productivity had risen by a respectable 5.8% per year in large firms with 500 or more employees. In small firms with ten or fewer employees, by contrast, labor productivity growth had declined at an annual rate of 6.5%.
Moreover, the share of employment in these small firms, already at a high level, had increased from 39% to 42% over this period. In view of the huge gulf separating what the authors called the “two Mexicos,” it is no wonder that the economy performed so poorly overall. As rapidly as the large, modern firms improved, through investments in technology and skills, the economy was dragged down by its unproductive small firms.
This may seem like an anomaly, but it is in fact an increasingly common occurrence. Look around the developing world, and you will see a bewildering fissure opening up between economies’ leading and lagging sectors.
What is new is not that some firms and industries are substantially closer to the global productivity frontier than others. Productive heterogeneity – or what development economists used to call economic dualism – has always been a central feature of low-income societies. What is new – and distressing – is that developing economies’ low-productivity segments are not shrinking; on the contrary, in many cases, they are expanding.