Manufacturing Firms in Developing Countries: How Well Do They

THE MANUFACTURING SECTOR isoften the darling of policy makers in less developed countries (LDCs). It is viewed as the leading edge of modern-ization and skilled job creation, as well as a fundamental source of various positive spillovers. Accordingly, although many LDCs have scaled back trade barriers over the past twenty years, the industrial sector remains relatively protected in the typical country (Maurice Schiff and Al-berto Valdez 1992, ch. 2; Refik Erzan et al. 1989; Francis Ng 1996).2 Governments also promote manufacturing with special tax concessions and relatively low tariff rates for importers of manufacturing machinery and equipment. At the same time, many observers be-lieve that the maze of business regula-tions is unusually dense and unpre-dictable in LDCs.3 Summarizing an ex-tensive survey of managerial attitudes around the world, Aymo Brunetti, Greg-ory Kisunko, and Beatrice Weder (1997) report that LDC firms generally consider the institutional obstacles to doing business more burdensome than their OECD counterparts.4 The regula-tory problems that they view as more severe include price controls, regula-tions on foreign trade, foreign currency regulations, tax regulations and/or high taxes, policy instability, and general uncertainty regarding the costs of regu-lation. Other types of regulation—in-cluding business licensing and labor laws—are not viewed as especially bur-densome on average in the LDCs, but constitute major problems in certain developing countries.5 1