Dr. Godius Kahyarara Senior Lecturer, Economics Department, University of Dar-es-Salaam

1. Methodologies for Measuring Benefits from Competition and Lessons: A case of Market Competition and Firm Level Performance in Tanzania Dr. Godius Kahyarara Senior Lecturer, Economics Department, University of Dar-es-Salaam

2. Introduction • The analysis presented here is for assessing the impact of Competition on firm level performance in Tanzania manufacturing firms • Specific focus of is on product market competition triggered by economic liberalization introduced three decades ago. • The performance of firms considered here is in terms of; 1) Profit and 2) productivity

3. Background • The analysis is based on two empirical works that I have been involved. The first one is the preparation of UNCTAD II chapter on Competition. This was an assignment supported by UNCTAD during 2005/6. • Nearly five years later i.e. in 2010, World Bank Washington in collaboration with country office requested a follow up on what had happened from the time of first round analysis of 2006. • Both studies were motivated by substantial shift in market regime from inward looking state led economy to outward oriented liberal economy. Tanzania was a good case

4. What links Competition and firm level performance? • It is anticipated that competition enhances productivity of manufacturing firms. • Most significant outcome of productivity increase can be reduced production cost, increased output, quality and profitability. • Ultimately, productivity gains will be most beneficial to consumers if competition ensures that reduced costs or increases in quality are passed on to them.

5. Approach to Both Studies • The approach focus on relationship between competition and productivity via three possible ways; increased internal efficiency (x-efficiency); stimulating innovation and reduced administrative barriers to entry, increased consumers driven competition through the choices they make. • Using such information we first ensured availability of rich historical data to allow ex-post versus ex-ante market situation. [data on legal, policy, pricing, sales, profit, cost, exit etc]

6. Competition Effect on firm Productivity

7. Competition Measure

8. Concentration in Tanzania Manufacturing Sectors

9. Top 3 Concentration Ratio: 2004-2005 Average vs. 2006-2007 Average

10. HAS COMPETITION ENHANCED FIRM LEVEL PERFORMANCE IN TANZANIA MANUFACTURING? • The OLS results indicate a positive correlation between competition and productivity. In particular it is indicated that 1 percent increase in competition results into 0.4 percent increase in productivity. • However, the results are weakly statistically significant. When the panel estimates based on GMM and Fixed Effects are introduced the correlation between competition and productivity disappear.

11. What about competition effects of Profit?

12. Conclusions and Recommendations • Major conclusion of the study is that there are broad ranges of micro level characteristics that influence firm performance that are not entirely addressed by macro level reforms including competition. • Besides competition has not progressed well as monopoly still exist in some areas • Exit is hard in some instances especially when multiple production exists as subsidy base • Policy actions to tackle down are needed before we can expect trickle down to materialize.

13. USEFULNESS OF THE INSTRUMENTS USED TO ASSESS COMPETITION • In assessing firm level competition concentration ratio combined with Production function were used. • In some cases competition has macro and micro level effects that cannot be adequately addressed using a single approach. Detailed historical data is required. That can link performance change with changing market environment • But a blend of Quantitative other descriptive analysis coupled with interviews is highly recommended. • THEREFORE LESSONS FOR FUTURE RESEARCH IN COMPETITION IS THAT NO ONE SHOE SIZE FITS ALL METHODOLOGY IS POSSIBLE, CASE BY CASE CONSIDERATION OF METHODOLOGY IS RECOMMENDED