Trade Preferences, Economies of Scale and Dynamic Productivity Upgrading in African Manufacturing Firms: The Production Technology–Institutional Context Nexus

Abstract

Economic justification for the idea that a trade preference incentive can, through its enhanced market facility, bring about dynamic productivity gains to beneficiary firms is rooted in the logic of economies of scale. Under the assumption that this scale driven efficiency does not accrue randomly to firms, this paper argues that striking the right kind of complementarity between attributes of production technology and those of the institutional environment is the key to realizing it. Precisely, a framework is presented in which a production technology with strong potential for internal (firm level) economy requires availability of highly skilled and competent professionals in the management of large scale concerns for successful appropriation. On the other hand, if the potential for scale economy is revealed to be strong only at external (industry) level, then success in actualizing it would ultimately be determined by the efficiency of socioeconomic support structures that obtains in the wider macro level environment. Empirical support for these claims is demonstrated in the responses of African manufacturing firms to the trade incentives of African Growth and Opportunity Act Scheme.