Achieving Scale Collectively
Abstract: Technology is often embodied in expensive and indivisible capital goods, such as production machines. As a result, the small scale of firms in developing countries could hinder investment and productivity. This paper argues that market interactions between small firms substantially attenuate this concern, by allowing them to achieve scale collectively. We design a firm-level survey to measure production processes in three prominent manufacturing sectors in urban Uganda. We document the emergence of an active rental market for machines among small firms, and we build and estimate an equilibrium model of firm behavior to quantify its importance. Our results show that the rental market almost doubles the share of firms using machines, and increases labor productivity by 8%, relative to a counterfactual economy where renting is not possible. We show that the rental market leads to significant gains in our context because it mitigates substantial imperfections in the labor, output, and financial markets.
