Show Notes
If you walk down a street in a low-income country, count the businesses you can see, you will miss many entirely. Someone who cooks at home and sells at the roadside never appears in a registry. What we know about businesses in developing countries has always been incomplete. In this week's VoxDev Talk, Marcela Eslava (Universidad de los Andes Bogota) talks to Tim Phillips about two decades of research into why firms in developing economies stay small, grow slowly, and rarely break through. A worker in a developing economy is about three times more likely to be running, or working in, one of these very small businesses than a worker in a high income economy, and far more likely to be self-employed, a one-person firm. Weaker human capital and less access to technology make it harder to start a business. Costlier credit, labour regulation that makes it difficult and expensive to employ staff, and taxes on formal firms make it harder to grow. Some of these distortions are even introduced by well-meaning policymakers, such as low taxes for small firms - which then effectively tax growth. The research behind this episode: Eslava, Marcela. 2026. "Firm Size and Dynamics in Less-Developed Economies." Annual Review of Economics, volume 18. Review in advance; changes may still occur before final publication. To cite this episode: Phillips, Tim, and Marcela Eslava. 2026. "Why businesses stay small in emerging markets." VoxDev Talks (podcast).
About the guest
Marcela Eslava is Professor of Economics and Dean of the Faculty of Economics at Universidad de los Andes in Bogota¡, and President of the Latin American and the Caribbean Economic Association. Her research spans firm dynamics, productivity and demand at the firm level, labour informality, credit constraints, and the regulations that shape how businesses grow in developing economies. Research cited in this episode
The Lucas-Hopenhayn framework. The workhorse model of firm dynamics, built on Robert Lucas's 1978 account of occupational choice and Hugo Hopenhayn's 1992 model of entry and exit; it links the size of the average firm to the productivity of potential entrepreneurs and to distortions that stop the most efficient firms from scaling. Eslava's review extends it to explain why firms are smaller in poorer economies. Nonemployers and micro employers. Own-account and self-employed workers plus the smallest employers; in Eslava and co-authors' sample of 51 economies they account for over 90% of employment in lower-middle-income economies and around 20% in the United States. Their dominance is the main reason average firm size is so low in poorer countries. Correlated distortions. Taxes, regulations and credit frictions that fall more heavily on high-productivity firms; because they hold back the firms that should be growing, they push labour towards less productive businesses and drag down aggregate output. They show up in the models as residuals, the part of the size gap that productivity and quality cannot explain. Size-dependent policies. Rules that switch on above an employment threshold, such as the extra workplace obligations that apply to firms above 50 employees in France, or above 20 in Peru; Eslava describes comparing firms just above and just below a threshold as one way to prise open the black box of distortions and measure what a specific rule does. Demand versus cost efficiency. Work on Colombian manufacturing decomposing a firm's success into technical efficiency and the appeal of its products; the demand side contributes many times more to differences in revenue than cost efficiency does. Eslava's point is that trimming costs buys survival, while product quality and market access drive real growth. The data-coverage puzzle. Early firm-level studies found average firm size falling as countries got richer, the reverse of what later work established; the anomaly came from datasets that captured only the large, registered firms in poor economies and missed the vast
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