Market Competition and Performance of Tanzanian Manufacturing

Godius Kahyarara
(Economics Department, University of Dar-es-Salaam, P.O.BOX 35045, Dar-es-Salam, Tanzania)

Abstract: The paper analyses the impacts of market competition on performance of firms in developing countries. The critical empirical question addressed by the paper is the question ‘Why competition has not boosted firm level performance?’ The paper addresses the questions by using panel data to estimate productivity effects of competition controlling for firm fixed effects and other determinants of productivity. Estimates of a Cobb Douglas production function. Competition is measured using the Hirschman-Herfindahl Index (HH) as competition variable indicates that 1 percent increase in competition results into 0.4 percent increase in productivity. However, the results are not robust when GMM and Fixed effects estimates are applied suggesting; biasness of OLS estimates and the fact that more productive firms are likely to self select into more competitive firms. Furthermore, the results indicate a positive correlation between firm specific characteristics with competition which influence profitability. Major conclusion of the paper is that there are broad ranges of micro level characteristics that influence firm performance that are not entirely addressed by macro level reforms including competition. Policy actions to tackle down are needed before we can expect trickle down to materialize.

Key words: Herfindahl; competition and firm level productivity

JEL codes: D43, L22