ABSTRACT
This chapter is devoted to a statistical examination of the production function of the manufacturing industries, as indicated by the samples in the RPED surveys in the seven countries. Since we are interested in the first instance at differences between countries we pool all industries together. The motivation for this chapter is to study the characteristics of firms of different size-groups. It confronts the issues surrounding the policy concerns of the popular thesis of “small is beautiful.” How different is the use of capital relative to labor in different size groups? Protagonists of large-scale production maintain that the promotion of small firms is misguided because, given the mix of technologies found in African economies, more productive technologies are the more capital-intensive ones, and there is strong positive correlation between capital intensity and firm size. Is there any evidence of increasing returns to scale in African manufacturing? On the other side of the debate, there is a persistent argument in favor of special promotion of small firms based on the theory of correct “social” price of the factors of production. It is maintained that, while at market prices, large firms might indeed show higher private profitability, small firms are at a serious disadvantage in the capital market. Hence, if this distortion in the capital market were removed, small firms would perform better in terms of their profitability than is revealed by the market data. It is true, the argument continues, that small firms pay lower wages than larger firms. But this wage advantage does not offset the higher relative cost of capital. This is because a major reason for the observed wage differential is that labor in larger firms is more efficient. Thus, the cost of an efficiency unit of labor would be much less than the observed difference in wage per worker. In section 3 to follow, we try to take account of this argument by calculating social benefit-cost ratios for different classes of firms at alternative interest rates, which are uniform across size classes.
