Competition and Productivity in Latin America and the Caribbean

Competition is a core element of economic growth, but empirical evidence on how competition affects productivity in the Latin America and the Caribbean (LAC) region is limited. This study fills this gap with state-of-the-art empirical research. It draws on firm surveys in the formal sector and novel domestic competition enforcement datasets in Chile, Colombia, Mexico, Peru, and Uruguay. The study also presents new methodologies to empirically measure the impact of competition on productivity arising from the enforcement of competition laws, and import competition in manufacturing, services, and ICT sectors. There are several main findings. First, the enforcement of domestic competition increases firm productivity in the affected markets and the value chains in Chile, Colombia, Mexico, Peru, and Uruguay. Second, the removal of local barriers to entry increases firm productivity in Peru. When looking at trade, only a small fraction of the most productive firms in Chile is able to respond to a sharp increase in imports from China by increasing productivity or innovation efforts, highlighting the need for complementary policies during trade liberalization. In particular, ensuring market contestability is key for preparing firms to weather such shocks and emerge as more productive markets. But complementary policies are also necessary to increase the effectiveness of competition: innovation policies, including strengthening of managerial capabilities, play a strong role, as do policies that help mitigate the impact of trade shocks, such as education policies and worker re-skilling programs.