What drives the size distribution of firms in developing countries?

This paper contends that the key impact of government policy comes through its influence on the optimal sectoral output mix (trade policy) or on the first best intra-industry structure of production (credit policy). In most industries, the composition of output is more important for the size distribution of enterprise than are intra-industry structural changes; where small firms are under-represented, it is largely because economy-wide composition of output is biased toward industries where large firms tend to dominate. Hence, economic policies, such as those supporting import substitution, which shape the composition of industrial production can have profound implications for the size distribution of enterprise in a developing country. Also, in industry sectors where economies of scale do not foster large firm dominance, policy non-neutralities can significantly influence intra-industry firm size distribution. (Author abstract, modified)