92279 Measuring Firm Performance in Latin America and the Caribbean1 REV. 8/2014 The Enterprise Surveys provide a unique Basic Definitions data set to estimate firm performance Countries surveyed in 2010 and how they are grouped There are many measures of firm performance: revenue, for analysis: profitability, stock price, and production efficiency, to In 2010, Enterprise Surveys (ES) interviewed 12,855 name just a few. This note, Measuring Firm Performance in Caribbean Series Note No. 2 enterprises in 30 Latin American and Caribbean Latin America and the Caribbean focuses on two measures. countries. In addition in 2009, 1,802 firms were First, real labor productivity growth (the annual rate interviewed in Brazil also following the standard of growth of real sales per worker) is used as a proxy ES global methodology. for how efficiently a firm uses its labor inputs.2 Second, For analytical purposes, the 31 countries are categorized employment growth is used as a measure of the absorption into 3 groups: of labor in the production process. Both measures are Small Caribbean countries: Antigua and Barbuda, The expressed as annualized growth rates.3 Ideally, growth is Bahamas, Barbados, Belize, Dominica, Grenada, based on both higher productivity and rising employment, Guyana, Suriname, St. Kitts and Nevis, St. Lucia, and St. as more resources are put to work productively, but these Vincent and the Grenadines measures do not always move in tandem. Medium-size countries: Bolivia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Several studies have shown that productivity growth is Jamaica, Nicaragua, Panama, Paraguay, Uruguay, and a driver of economic prosperity, and that languishing Trinidad and Tobago productivity in manufacturing and services is preventing and the Large countries: Argentina, Brazil, Chile, Colombia, the LAC region from catching up with the developed world Mexico, Peru, and Republica Bolivariana de Venezuela. (Pagés 2010). Adding to this trend, evidence suggests that production inputs, such as labor, are not shifting to Two waves of Enterprise Surveys, 2006 and 2010: more productive activities, slowing income and economic World Bank Group Latin America Fifteen countries were surveyed in 2006 using the ES growth, potentially stunting gains in productivity (Rodrik global methodology: Argentina, Bolivia, Chile, Colombia, 2011). Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and At the same time, the size of a firm can also play a role in Republica Bolivariana de Venezuela. In total, 10,930 its performance. Some studies have shown that larger firms firms were interviewed in 2006, of which 3,535 were are more productive than smaller ones (Castany et al. 2005; re-interviewed in 2010. Van Biesebroeck 2005; Pagés 2010) due to factors such as Reference periods of the survey data: better access to technology, managerial skills, finance, and The information collected in the surveys refers to learning. At the other extreme, the flexible, non-hierarchical characteristics of the firm at the moment of the survey structure of small firms can give these firms a productivity (2006, 2010 and 2009 for Brazil) or to the last completed advantage. Indeed, several empirical studies have shown a fiscal year (2005, 2009, and 2007, respectively). In addi- decrease in productivity as size increases (Geroski 1998; tion, sales, employment, and labor productivity annual Tybout 2000). growth rates are calculated comparing data from the last complete fiscal year of each survey and recall data. While most studies compute performance measures using Consequently, growth rates refer to the period 2002- national accounts information, the firm-level Enterprise 05 for the 2006 surveys, 2004-07 for the 2009 Brazil Surveys (ES) provide a unique opportunity to estimate survey, and 2007-09 for the 2010 surveys. 1 performance using comparable, firm-level data across the Yet labor productivity growth in manufacturing varied region. Indeed, the ES show that on average, the annual considerably across LAC in 2010, rising sharply in some growth rate in real labor productivity is declining in both countries, such as Trinidad and Tobago (9 percent), the manufacturing and services sectors in LAC. However, followed closely by Honduras and El Salvador—although both sectors are also adding jobs, reporting positive annual in the case of the latter two countries, productivity growth job growth on average. Together, these trends show that was accompanied by declines in employment growth. By the region’s businesses are growing their workforce, but contrast, in some other countries, such as Costa Rica (-11 gains in revenues are lagging. This trend is stronger in the percent labor productivity growth) and several countries manufacturing sector than in services. in the Caribbean, such as Suriname, St. Kitts and Nevis, Jamaica, Antigua and Barbuda, and the Bahamas (-7 percent labor productivity growth on average), productivity Manufacturers in Latin America and the in manufacturing fell dramatically as firms added jobs and Caribbean are experiencing negative sales contracted (Figure 2). productivity growth on average Growing economies require firms that increase production Manufacturers are adding jobs but sales and allocate resources efficiently. The ES data show that growth is not keeping pace with job while manufacturing firms in LAC increased employment expansion in 2010, their labor productivity declined. This trend contrasts with that observed in Sub-Saharan Africa, While on aggregate labor productivity growth in Eastern Europe and Central Asia, and East Asia and manufacturing is negative, manufacturers are adding jobs. Pacific, where growing employment in manufacturing was Employment growth among manufacturers was positive accompanied by growing labor productivity.4 In fact, LAC has shown the poorest productivity growth compared with other regions of the world, exhibiting a steep decline, FIGURE 2 GROWTH IN MANUFACTURING IN 2010 while the employment growth rate was the second lowest after Eastern Europe and Central Asia (Figure 1). 15 TTO PER FIGURE 1 PERFORMANCE IN MANUFACTURING URY BY REGION 10 10 GRD Annual Real Sales Growth (%) BRA 8 ECU PRY 5 6 SLV DOM ARG GUY VCT Growth Rate (%) CHL BLZ HND LCA DMA 4 NIC 0 KNA 2 GTM MEX COL ATG BHS CRI JAM 0 BRB -5 SUR -2 -4 -10 Sub-Saharan East Asia Eastern Latin America South -6 -4 -2 0 2 4 6 8 10 12 Africa & Pacific Europe & & Caribbean Asia Central Asia Annual Employment Growth (%) Labor Productivity Growth Employment Growth Positive Productivity Growth Negative Productivity Growth Source: Enterprise Surveys. Source: Enterprise Surveys. 2 MEASURING FIRM PERFORMANCE across most countries in LAC in 2010, resulting in an points, on average, for the 12 countries for which this 2 Measuring Firm Performance average employment growth rate of 4.6 percent among comparison is possible.7 In seven of these 12 countries, the region’s manufacturers. As Figure 2 shows, only 5 out labor productivity growth rates either accelerated or of 28 countries in the region experienced a reduction in remained stable. Among the countries that experienced employment in 2010: Honduras, El Salvador, Guatemala, a deceleration in manufacturing labor productivity, the Mexico, and Chile.5 largest deceleration occurred in Colombia and Argentina, both of which had positive 2006 growth rates turn to Only a handful of the 28 countries covered in this note negative rates by 2010. achieved growth in both employment and productivity in manufacturing: Trinidad and Tobago, Peru, Uruguay, Concurrent with these trends in productivity growth, annual and Ecuador.6 Peru had the highest employment growth employment growth decelerated between 2006 and 2010 rate (11 percent), but Peruvian manufacturers increased for these 12 countries, though remained positive overall. sales at an even faster rate, thus increasing their In half of these countries the rate of employment growth productivity. Meanwhile, a notable number of countries decelerated considerably;8 in two other countries—Peru in LAC, including larger ones such as Brazil and and Uruguay—employment growth rates remained flat. Argentina, saw manufacturing employment increase Only in Chile, Ecuador, Mexico, and Paraguay did the rate of at a faster rate than sales, resulting in declining labor employment growth notably pick up. productivity. Larger firms in LAC have higher labor Productivity among manufacturers in the productivity; however, only small small Caribbean countries is falling at a manufacturers outside the Caribbean are greater rate than in the rest of the region experiencing a growth in productivity In the 11 small Caribbean countries, labor productivity Based on the 2010 survey, large manufacturing firms growth in manufacturing fared worse, on average, than in LAC have higher levels of labor productivity on in the rest of the region (-6 percent versus -1 percent average: in fact, the average labor productivity of large for large countries and -.1 for medium size countries). manufacturing firms ($54,897 per worker) is 47 percent In fact, none of the small Caribbean countries included higher than the labor productivity of medium firms in the report showed positive annual productivity ($37,285) and 114% percent higher than that of small growth in manufacturing. Still, each of these countries firms ($25,659). Yet, the region’s large manufacturers increased employment in this sector. Though no small are becoming less productive, showing negative labor Caribbean country was able to increase manufacturing productivity growth rates of approximately -3 percent, sales apace with employment growth, Caribbean compared to growth rates for medium and small firms manufacturers have higher levels of labor productivity of around -2 percent. The overall decline in labor (over $38,000 in sales per worker) than the rest of the productivity in the LAC region is in part driven by the LAC region (approximately $27,000). small Caribbean countries; in fact, excluding the 11 small Caribbean countries, small firms elsewhere in Latin America are increasing their labor productivity While the productivity growth rate for (at an annual rate of .3 percent) and medium and large manufacturers is negative, over time this firms more than halved their negative labor productivity. growth rate has been accelerating slightly while The more dynamic pattern of small firms is emphasized employment growth has been losing speed in the six large countries of the region, where small Comparing the results of the 2010 ES survey with the manufacturing firms had the highest labor productivity 2006 ES survey, the rate of labor productivity growth growth rates (1 percent, though with notable variation) picked up for the region’s manufacturers, with growth compared to -1 percent and -4 percent growth rates for rates accelerating by approximately 2 percentage medium and large manufacturing firms, respectively (Figure 3). IN LATIN AMERICA AND THE CARIBBEAN 3 as in manufacturing, employment in the services sector FIGURE 3 LABOR PRODUCTIVITY GROWTH IN LARGE COUNTRIES IN 2010 grew at around 5 percent per annum, which while positive, 6 lags behind the rates of employment expansion in other regions (Figure 4). 4 Labor Productivity Growth (%) 2 While services are adding jobs, in several 0 countries sales growth is lagging -2 The services sector is important in Latin America and the -4 Caribbean, employing nearly 67 percent of the region’s labor force. As in manufacturing, services firms are adding -6 jobs; employment growth in LAC averaged nearly 5 percent -8 for services firms, and this rate increases when the small -10 Caribbean countries are excluded (where employment in Argentina Brazil Chile Colombia Mexico Peru the sector grew at a lower rate of 4 percent per annum). Small Medium Large (5–19 employees) (20–99 employees) (100+ employees) Labor productivity growth rates in the services sector show a varied pattern across countries in the LAC region. Outside Source: Enterprise Surveys. of the small Caribbean countries, nine countries9 had positive growth in labor productivity, all while expanding Over time, manufacturing SMEs performed employment; four10 countries had positive employment better than large firms and sales growth, but were unable to achieve gains in Trends in manufacturing sector activity between 2006 and productivity (Figure 5). Services firms in the remaining four 2010 showed patterns that varied by firm size. Small firms countries,11 while adding jobs, experienced shrinking sales. accelerated their labor productivity growth, moving from an average negative rate in 2006 to a positive rate of growth in 2010—improving by over 3 percentage points. Medium- FIGURE 4 PERFORMANCE IN SERVICES BY REGION size manufacturers, meanwhile, moved from a productivity growth rate of -2 percent in 2006 to a slightly less negative rate of just below 0 percent in 2010. Taken together, SMEs 10 went from contracting productivity growth rates in 2006 (-2 8 percent) to growing productivity rates in 2010 (1 percent 6 annual growth). On the other hand, large firms experienced a notable deceleration in productivity growth rates, moving Growth Rate (%) 4 from positive rates in 2006 to a slightly negative growth rate 2 in real labor productivity in 2010. 0 For services in LAC, labor productivity is -2 also contracting -4 Sub-Saharan East Asia Eastern Latin America South Asia Across LAC, labor productivity is contracting in services, Africa & Pacific Europe & & Caribbean Central Asia with an annual growth rate of -1 percent on average, a drop only slightly lower than the annual -2 percent decline in Labor Productivity Growth Employment Growth EAP. All other regions used for comparison experienced an increase in labor productivity on average. Nonetheless, Source: Enterprise Surveys. 4 MEASURING FIRM PERFORMANCE There is some evidence that productivity 2 Measuring Firm Performance FIGURE 5 GROWTH IN SERVICES IN 2010 growth in services is picking up speed in 20 LAC ECU Comparing labor productivity growth rates over 15 TTO time in services, growth accelerated between 2006 COL and 2010. In 10 out of the 12 countries covered in both rounds of the survey, labor productivity growth URY 10 accelerated notably; only in Honduras, Paraguay, and Annual Real Sales Growth (%) CHL BRA Peru did this rate remain negative after accelerating SLV LCA VCT since 2006. 5 ARG BHS KNA GUY BLZ GTM MEX BRB PER DOM DMA GRD PRY Only small services firms are 0 HND increasing labor productivity in LAC NIC ATG While labor productivity levels in services do -5 SUR not vary significantly by firm size, as they do in JAM manufacturing, the data show that among services CRI firms only small firms experienced a slight increase -10 -6 -3 0 3 6 9 12 15 in labor productivity (growth rate of 0.1 percent) Annual Employment Growth (%) compared to negative rates for medium (-3 percent) Positive Productivity Growth Negative Productivity Growth and large (-3 percent) firms. As in manufacturing, Source: Enterprise Surveys. productivity declines in the small Caribbean countries pull down the LAC-wide averages. Outside the small Caribbean countries, for the average small Services in the Caribbean are adding jobs, services firm, labor productivity grew at a rate of 2 but productivity growth is negative percent – notably higher than the average growth rate of medium (-3.9 percent) and large firms (-1.3 percent). All small Caribbean countries experienced positive annual employment growth rates in services, yet Large services firms are increasing their only three of these countries (Belize, St. Lucia, and employment faster than SMEs in services St. Vincent and the Grenadines) also had positive labor productivity growth rates. These results Employment growth in services is positive across all indicate that despite relatively robust productivity— firm sizes in 2010. Large services firms had the highest on average Caribbean service firms report $42,000 in employment growth rate at 7.0 percent, compared with sales per worker, higher than elsewhere in LAC—the the rate of medium-size (5.0 percent) and small firms services sector in these small Caribbean countries is (4.0 percent). On average, the large countries in the region slowing down in terms of productivity growth. These exhibited similar employment growth (4.8 percent) to indicators nonetheless vary by industry: tourism and medium-size countries (5.4 percent), but greater than in wholesale trade were the only two industries that small Caribbean countries (4.1 percent). In all three groups showed positive growth in labor productivity among of countries, large services firms experienced the highest small Caribbean countries; both industries also had rates of employment growth (around 7 percent). positive employment growth in 2010. IN LATIN AMERICA AND THE CARIBBEAN 5 Small services firms are the most dynamic 3. Enterprise Surveys include recall questions on employment and sales data. Employment and productivity annual growth rates are in terms of labor productivity, but large computed using these data. Employment is measured as the total firms rebounded from 2006 number of full-time permanent workers. 4. Average growth rates for the region exclude Bolivia, Panama, and Among the 12 countries that had two waves of surveys, Venezuela, because sales recall variables for these countries were only available for fewer than half of the sample due to low 2006 and 2010, labor productivity growth rates for small response rates. For consistency, these three countries are also firms accelerated and was about 6 percentage points higher excluded from the analysis of employment growth. in 2010 than in 2006. Large firms reported productivity 5. For a few countries such as Mexico, the graphs show data that growth rates of -5 percent in 2006 and showed notable differs from the indicators in the country tables because the improvement by 2010, when their growth rate in labor graph is constructed using only the subset of firms for which labor productivity can be computed. Unlike in the tables, in the productivity was just below 0 percent. Medium firms did graph sales growth and employment growth are restricted to not experience much change in their labor productivity this subset as well. growth, which remained negative at around -2 percent. 6. On average, Chilean manufacturers also experienced positive employment growth; however, the subset of firms for which labor productivity growth could be calculated had negative Businesses across all size categories, while employment growth, as shown in Figure 2 adding jobs, are increasing employment at 7. Venezuela, Bolivia and Panama are excluded from the 15 countries with two rounds of surveys due to low response rates decelerating rates as explained in note 3. 8. Argentina, Colombia, El Salvador, Guatemala, Honduras, Employment growth rates have decelerated for all size and Nicaragua. services firms in the region; between 2006 and 2010 there 9. Argentina, Chile, Colombia, Ecuador, El Salvador, Guatemala, was positive job creation in each size group, but the rate Mexico, Trinidad and Tobago, and Uruguay. of growth decreased. Large firms experienced the largest 10. Brazil, the Dominican Republic, Paraguay, and Peru. decrease in the employment growth rate between the two 11. Costa Rica, Honduras, Jamaica, and Nicaragua. waves of the surveys (a deceleration of over 2 percent). This trend, alongside the flat to accelerating productivity References growth rates in services, may suggest that in this period, services firms—at least in the 12 countries for which data Castany, L., López-Bazo, E. and Moreno, R. (2005). “Differences in Total Factor Productivity Across Firm Size. A Distributional is available—were able to adapt to maintain productivity Analysis,” University of Barcelona Working Paper. gains. Geroski, P. (1998). “An Applied Econometrician’s View of Large Company Performance,” Review of Industrial Organization, Springer, vol. 13(3), pages 271-294, June. Endnotes Pagés, Carmen (editor) 2010, The Age of Productivity, Palgrave Macmillan, USA. 1. Lead authors: David C. Francis, Federica Saliola and Murat Seker, with the collaboration of the LAC report team. Rodrik, Dani. 2011. The Future of Economic Convergence. NBER Working Paper No. 17400 Issued in September 2011. 2. In addition to labor productivity, total factor productivity (TFP) was also computed using two different estimation methods. One Tybout J.R., (2000). “Manufacturing Firms in Developing Coun- is a trans-log production function using sales as output, and labor, tries: How Well Do They Do, and Why?,” Journal of Economic capital, and raw materials and intermediates as input factors; Literature, American Economic Association, vol. 38(1), pages another one is a Cobb-Douglas production function using sales as 11-44, March. output and labor and capital as input factors. Both TFP measures Van Biesebroeck, J., 2005. Firm Size Matters: Growth and Productiv- were significantly correlated with labor productivity levels for ity Growth in African Manufacturing. Economic Development and almost all of the countries. Due to the descriptive nature of the Cultural Change 53(3), 545-583. note and space limitations results are excluded. They are available upon request. Enterprise Surveys provide the world’s most comprehensive firm-level business environment data in developing economies. An Enterprise Survey is a firm-level survey of a representative sample of an economy’s private sector. The surveys cover a broad range of business environment topics including access to finance, competition, corruption, crime, gender, infrastructure, innovation, labor, performance measures, and trade. The World Bank has collected this data from face-to- face interviews with top managers and business owners in over 130,000 companies in more than 135 economies. Firm-level data and summary indicators are available on the website. www.enterprisesurveys.org 6 MEASURING FIRM PERFORMANCE