Firm Size and Dynamics in Less-Developed Economies

A growing body of evidence shows that businesses in developing economies are systematically smaller, grow more slowly, and exhibit lower turnover than those in advanced economies. These patterns are driven in part by nonemployer and micro businesses, which absorb the bulk of workers in low-income settings. This article reviews macro development research that extends the standard Lucas–Hopenhayn framework to account for the smaller size and more limited dynamism of businesses in poorer economies. Distortions that disproportionately affect high-productivity firms, together with lagging technologies, emerge as central explanatory forces, though they often fall short of replicating the empirical size-to-GDP elasticity. Incorporating nonemployers appears to improve the model's ability to match several dimensions of the data. Identifying actionable sources of distortions and technology gaps and combining firm-level data with individual-level sources are highlighted as additional promising avenues to improve the profession's understanding of sources of the development problem.