Sector Switching: An Unexplored Dimension of Firm Dynamics in Developing Countries

ownership variable is therefore an approximation, and we recognize there are “grey” areas
associated with this classification.

Given that only registered firms under the enterprise law are covered in the GSO data, care should
be taken when analysing some aspects of firm entry. The questionnaires after 2001 did not collect
information on establishment year, and given that firms entering in 2002, 2003 or 2004 may have
existed for several years before registering, doubt exists as to whether or not they constitute entrants
strictly speaking. Registration may be beneficial to firms (easier access to credit etc.), but it also
makes firms more visible to government authorities (and especially tax collectors). It is therefore
uncertain during which stage in their life-cycle a firm decides or is forced to register. Given the
nature of the data, the present paper focuses on efficiency differentials between incumbents, exits
and sector switching firms.

All annual censuses provide the information necessary to measure efficiency at the firm-level. We
use real value added as our output measure, calculated as the sum of gross profits and total labour
costs, deflated by a GDP-deflator defined at the two-digit sector level. Real capital stock is
measured as end-period capital stock book value deflated by an aggregate capital deflator and re-
valued by changes in prices of the capital stock. The labour input is measured as total employment
(only wage or salary receiving employees are included). Total payments to labour include: a) Wage,
bonus, allowances and other incomes, b) Payments in form of social insurance, c) Other incomes
those are not accounted in business costs, and d) Contributions of the owner to social insurance,
health care and trade union. Material inputs include all indirect costs plus raw material costs.
Material inputs are deflated by a producer price index defined at the two-digit sector level.

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