Access to skilled labor, institutions and firm performance in developing countries

• Published date: 07 May 2019
• Pages: 328-355
• Date: 07 May 2019
• DOI: https://doi.org/10.1108/IJM-11-2017-0301
• Author: Charilaos Mertzanis,Mona Said
• Subject Matter: Economics,Labour economics

Access to skilled labor,

institutions and firm performance

in developing countries

Charilaos Mertzanis

School of Business, Abu Dhabi University, Abu Dhabi, United Arab Emirates, and

Mona Said

Department of Economics, School of Business,

American University in Cairo, Cairo, Egypt

Abstract

Purpose –The purpose of this paper is to examine therole of access to skilled labor in explaining firms’sales

growth subject to the controlling influence of a wide range of firm-specific characteristics and country-level

economic and non-economic factors.

Design/methodology/approach –The analysis uses a consistent and large firm-level data set from the

World Bank’s Enterprise Surveys that includes 138 developing countries. An instrumental variables model

with a GMM estimator is used for estimating the impact of access to skilled labor on firm performance.

In order to obtain more robust estimators, the analysis introduces country-level controls reflecting the

influence of economic and institutional factors, such as economic and financial development, institutional

governance, education and technological progress.

Findings –The results document a significant and positive association between access to skilled labor

and firm performance in the developing world. The explanatory power of access to skilled labor remains

broadly robust after controlling for a wide range of firm-specific characteristics: sectoral and geographical

influences matter. The results also show that the association between labor skill constraints and

firm performance is mitigated by country-level factors but in diverse ways. Development, institutions,

education and technological progress exert various mitigating effects on firm-level behavior regarding access

to skilled labor.

Originality/value –The paper’s novel contribution is threefold: first, it uses joint firm, sector and

country-level information to analyze the role of access to skilled labor on firm performance; second, it uses

consistently produced information at the firm level from 138 developing countries; and, third, it considers the

controlling impact of a wide range of country-level factors that reflect a country’s overall development,

institutions and evolution.

Keywords Institutions, Survey data, Firm performance, Labour skills

Paper type Research paper

1. Introduction

Access to skilled labor is a key determinant of firm performance. Nickell and Bell (1995),

Machin et al. (1996) and Leuven et al. (2004) argue that intensifying competitive pressures on

firm performance have increased the demand for skilled labor, which in turn has revealed a

problem of skill shortage. The situation is more aggravated in developing countries

where education–occupation mismatches as well as other labor market specificities result in

skill shortage fluctuations thereby affecting firm performance. For instance, Bhattacharya

and Wolde document that reducing the labor skill shortage from the MENA region

average to the world’s average could result in a 4 percent increase in per capita GDP

annually. Fakih and Ghazalian (2015) document for the same region the importance of

various firm-specific characteristics and institutional factors in explaining labor skill

shortages. Brixiova et al. (2009) show that labor skill shortages affect the pace of

convergence of transition economies in Central Europe toward European structures. Tan

et al. (2016) find that deficiencies in the education and training systems in Tanzania

compromise the quality of labor skills, giving rise to skill shortages, thereby constraining

International Journal of Manpower

Vol. 40 No. 2, 2019

pp. 328-355

© Emerald PublishingLimited

0143-7720

DOI 10.1108/IJM-11-2017-0301

Received 16 November 2017

Revised 21 August 2018

Accepted 28 October 2018

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/0143-7720.htm

328

IJM

40,2

the operations and growth of formal sector firms in the country. Fajnzylber and Fernandes

(2009) show that firms in Brazil and India that engage in international trade and foreign

direct investment activities experience more or less severe labor skill constraints depending

on their technology diffusion and extent of trade specialization, respectively.

This paper analyzes the relation between labor skill shortages of firms and their

performance in developing countries. The analysis of the relation is carried out under

different economic, educational and technological conditions. The novel contribution of the

paper is threefold: first, it uses firm, sector and country-level information to analyze the role

of firms’access to skilled labor on their performance; second, it uses consistently produced

information at the firm level from 138 developing countries; and, third, it considers the

controlling impact of a wide range of firm-specific characteristics and country-level factors

that reflect a country’s overall development, educational and technological conditions.

To our knowledge, this is the first paper that analyzes in detail this relation in a wide range

of developing countries. Our paper contributes to the literature on the impact of labor supply

conditions on firm performance in developing countries.

The results document a significant positive relation between access to skilled labor and

firm performance in the developing world that remains broadly robust to various firm-level

controls comprising a wide range of firm-specific characteristics (age, size, sector of

activity, location, export status, ownership, etc.). Importantly, the results also document that

the interaction between access to skilled labor and firm performance is mitigated by

country-level factors, such as the levels of development, income inequality, education and

technological progress. In order to develop a more solid basis for steering labor market

reform to improve firm performance in the developing world, policy makers need to

understand more adequately the influence of firm-specific factors and the economic and

institutional environment conditioning the interaction between labor skill constraints and

firm performance.

In what follows, Section 2 reviews the related literature; Section 3 describes the data and

the empirical methodology used for the analysis; Section 4 explores the power of labor skill

constraints and other firm-specific characteristics in predicting firm performance; Section 5

extends the analysis to include the controlling impact of country-level factors; and Section 6

concludes the paper.

2. Related literature

Labor skills are competencies needed to carry out the tasks and duties of a given job

(ILO, 2012, p. 11). These competencies include cognitive (i.e. literacy), non-cognitive (i.e. team

work, communication, language, IT use and other soft skills) and job-specific skills. Skill

formation is the result of a successive sequence of education, training and labor market

participation activities (Banerji et al., 2010). Few developing countries have comprehensive

information on these different competencies (World Bank, 2014).

The importance of labor skills for firm performance can be understood by reference to

the competitive pressure on firms to survive and grow in the modern globalized world. This

requires faster productivity growth and efficient strategy adaptation. Syverson (2011)

reviews the evidence on the determinants of firm productivity growth highlighting the

pervasive within-sector dispersion in productivity levels across firms. Hsieh and Klenow

(2009) show that this dispersion is larger in developing countries. The within-sector

dispersion in productivity levels among firms also appears to persist over time. The

evidence suggests that firms exhibit heterogeneous internal capabilities that persist over

time and respond with different efficiency to uncertain external demand.

Firms appear to offer two different responses to these challenges. The first focuses on the

competitive adjustment of their cost structure and output composition to align with the

broad shifts in overall demand brought about by the business cycle, trade liberalization

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countries