Physical Infrastructure and Productivity

those at the top 10 percent of the distribution; that is, the TFP premium is 32 to 45 percent, and that of labor productivity is 52 to 75 percent (Barseghyan and DiCecio 2011).

Country case studies also confirm that entry barriers are a likely cause of misallocation. In India, entry barriers in the form of market regulation have resulted in industries characterized by the prevalence of unproductive (usually small) firms that coexist with a few productive (usually large) firms, lowering aggregate productivity (McKinsey Global Institute 2001). Similar findings hold for Brazil (McKinsey Global Institute 2006), OECD countries (Nicoletti and Scarpetta 2003), and transition economies (Bastos and Nasir 2004). In addition, product market and entry regulations tend to have a negative effect on employment growth in France (Bertrand and Kramarz 2002). In Ethiopian manufacturing, the evolution of industry productivity has been significantly shaped by the size of the local market, transportation costs, and entry barriers such as licensing fees (Jones et al. 2019a).

However, entry barriers have indirect effects on other aspects of firms’ activities and hence shape productivity growth at the firm and aggregate levels. For example, the threat of entry influences the productivity growth of incumbent firms by affecting their innovation activities in manufacturing in the United Kingdom (Aghion et al. 2009). In technologically advanced industries, the threat of foreign firm entry provides incentives to incumbents to undertake innovation activities targeted toward surviving the threat of foreign entry, whereas the opposite holds in technologically laggard sectors because the threat of foreign entry lowers the expected return from innovation.

Physical Infrastructure and Productivity

Sub-Saharan Africa’s economic prospects have been hampered by the extreme infrastructure gap, which is further compounded by the geographic disadvantages of remoteness from global market centers given that many countries in the region are landlocked. The gap in infrastructure has resulted in high transportation and communications costs and, consequently, limited and weak domestic and intra- and interregional connectedness.

Two key factors account for the region’s underdeveloped infrastructure. The first is the lack of financial resources. Investments to develop extensive and high-quality infrastructure are constrained because of the low tax base and limited capacity to generate enough revenue to finance such projects. This shortcoming is critical, given that most infrastructure services are underpriced and often rely on public subsidies. The second factor is the lack of political commitment to encourage private sector investment, coupled with rather poor public sector management. Together, these lead to corruption,