As part of our interview series, we ask renowned experts in the field about the future of research in development economics, and for their advice for young researchers. For this interview, we got the opportunity to talk to Prof. Eric Verhoogen.
Eric Verhoogen is a Professor at the Department of Economics and School of International and Public Affairs at Columbia University. His main research area is industrial development — firms, innovation, productivity, trade, industrial policy, labor markets in developing countries.
ETRM: How would you define development economics on the frontier, particularly as it relates to industry development?
Eric: I think there’s a growing realization that the behavior of firms — how innovative firms are being, and how much they are upgrading — is an important part of the development process. In order to have sustained reduction in poverty levels, people have to have jobs. One of the most effective anti-poverty programs is a steady job.
For historical reasons, there hasn’t been a lot of work on firms in development economics, although recently, that has been changing. Part of it was because industrial policy was seen as kind of a bad word in economics; you didn’t want to be seen to be too interventionist. Additionally, the new wave of randomization within development started with things that were easier to randomize. Randomization is much harder to do at the firm level.
Happily, in the past five to ten years, there’s more and more work studying firms. Some of the increase is due to greater availability of funding from organizations like PEDL and IGC. While the subfield is growing, with more work being done by young faculty members and Ph.D. students, it is still at an early stage. I see it as a real frontier – taking applied micro and / or RCT methods and applying them to questions like: What’s getting in the way of upgrading? What’s leading firms to be more innovative? What’s leading them to upgrade? How to get countries to grow and firms to generate jobs? We want to analyze these questions in a rigorous way, using tools that have been developed in development, labor, public finance and other areas.
ETRM: Previously, probably in the 60s or 70s, one way people thought about growing a country, from a macroeconomic perspective, was through industrialization. But now, in regions like South America, there’s a trend of entrepreneurship in the service sector that doesn’t fit with the narrative of industrialization. What are your thoughts on manufacturing versus services?
Eric: Good question. I don’t have a strong view on whether it’s going to be manufacturing or services that’s going to generate the jobs. Rodrik and Stiglitz have a relatively recent paper where they’re arguing that new manufacturing is too capital intensive and won’t be able to absorb employment and the future lies in services. I’m pretty agnostic on this question. For a lot of the work I do, it’s not crucial whether firms are in manufacturing or services. Often, we have better data on manufacturing firms, and in the trade data we see trade flows of manufactured goods in a way we don’t see flows of services. That’s why a lot of the focus has been on manufacturing. But fundamentally, I think the issues are very similar in the two types of firms. An interesting question is whether learning spillovers are stronger in manufacturing than they are in services or other sectors. The traditional argument was that these dynamic learning externalities are very strong in manufacturing, and hence government intervention is especially necessary in manufacturing. There could also be these learning externalities in services – learning to organize things better in your store, to appeal to consumers – that might spread among the service sectors. While the traditional view was that those are weaker, I think we don’t really know. We need a lot of more research on where the externalities are. Those externalities will point us to where policy should focus. To be honest, I don’t think we have the knowledge base right now to say, “Oh, actually, we know that in this sector, there’s more externalities than in this sector, and therefore that’s where our focus should be.”
ETRM: Firms are an interdisciplinary subject related to a variety of subfields, like development and industrial organization. What advice would you give to PhD student pursuing research on firms given the interdisciplinary nature of firms and the challenges of publishing in diverse subfields?
Eric: There are two issues here. One is that this area of research on firms in developing countries is still methodologically heterogeneous. People come from different fields—IO, macro, trade, development—and bring the methods from their respective home fields. The diversity of methods can make publishing on firms challenging since a paper might be reviewed by someone with an IO perspective, a macro perspective, a trade perspective, or a development perspective.
A related challenge is identifying your primary field. It’s important to decide whether you’re primarily a development economist, an IO economist, a macroeconomist, a trade economist, or something else. My advice is to have a clear “home field.” You should primarily identify with one field and complement it with others if possible. For example, I’ve always identified as a development economist first, with trade as my secondary field, and labor as a tertiary field. Consistency in this identification is key. While it’s okay to explore early on, by the time you’re on the job market, you need to clearly articulate your primary and secondary fields since hiring is often organized around specific fields. People would be reluctant to hire you as a development economist if they’re not sure you’re a development economist.
ETRM: You mentioned how firms are understudied in a developing context. Do you feel like there are very promising areas of inquiry that have a lot of opportunity, or are currently not getting the attention that you think they should?
Eric: A lot of new research is shaped by the availability of data sets. While I recommend being question-driven, the reality is that you need data to analyze those questions. In recent years, we’ve seen the emergence of very rich administrative data, particularly firm-to-firm data from VAT and tax systems. When I started out, manufacturing panel data that allowed tracking individual establishments over time was relatively new. However, those data sets didn’t show who firms were doing business with. Now, with VAT data becoming available in countries like Costa Rica, Turkey, Chile, China, Ecuador, and Brazil, among others, it’s possible to explore firm relationships in much greater depth.
These data open up a range of new research questions. For example, we can now study how firm relationships form, estimate externalities between firms that we discussed earlier, and analyze how shocks propagate through economies via input-output linkages. This is an exciting frontier for research.
Another area I think is ripe for exploration is what I call the behavioral economics of the firm. Drawing an analogy to the behavioral economics of individuals, we could ask: how do firms actually behave? Behavioral economics has shown that individuals often deviate from standard models due to patterns like loss aversion or biases in processing information. Similarly, firms—or the individuals and organizations within them—might also exhibit systematic deviations from traditional economic models. These deviations might stem from individuals making sub-optimal decisions—an entrepreneur making a mistake for example—but firms as a whole might be deviating from what our models would predict even if every individual within them is optimizing.
In one study, we introduced a cost-reducing technology to soccer ball manufacturers. Despite its clear benefits, firms didn’t adopt it. Our explanation was that, while individuals within the firms were optimizing, contracting frictions and information-flow issues prevented the firm as a whole from adopting the optimal solution. This is an example of an anomaly—behavior that deviates from what traditional models would predict. A research program could begin by documenting such anomalies in firm behavior and then build theories to explain them. If these behaviors are consistent and systematic, what implications might they have at a more aggregate level? This approach could lead to valuable insights, though it’s always hard to predict where these ideas will take us.
ETRM: One of our recent blog posts was related to middle managers in Africa and how their absence could be a barrier to growth. I was wondering what other barriers you think firms in developing countries face or what common issues have arisen in various countries?
Eric: I agree with the observation that middle managers and skilled workers, such as engineers, are often scarce. This scarcity is one reason wage inequality tends to rise when a country begins accessing international markets—there’s high demand for these types of workers.
A couple of points are worth highlighting. First, upgrading output quality, which is typically necessary to sell on international markets, requires access to high-quality inputs. This includes not just skilled labor but also high-quality materials, machines, and other resources. Without these inputs, producing high-quality output is challenging. This points to a danger of tariffs, which can prevent the import of high-quality inputs at lower prices. In many countries, it’s very difficult to source such inputs domestically, creating a significant barrier to upgrading.
Second, market access plays a critical role. The wealthier the end consumers you’re selling to, the greater the pressure to upgrade your products. Firms selling domestically, or into supply chains targeting poorer consumers, don’t face the same pressure to meet the demands of wealthier, more discerning customers. This lack of market pressure can hinder the upgrading process.
A third barrier is know-how. Entrepreneurs often have limited knowledge, and acquiring know-how can be costly. While evidence on training interventions is mixed, recent research suggests that high-touch, intensive training programs can significantly improve firm performance. These programs address the fact that entrepreneurs in developing countries often lack not only technical knowledge about production but also knowledge about the markets they aim to enter. Know-how isn’t just about how to produce something; it’s also about understanding how to sell effectively and appeal to consumers. This includes insights into market dynamics and consumer preferences, which are often just as important as the technical aspects of production. An interesting example comes from Juan Carlos Hallak and co-authors’ case studies in Argentina . They found that pioneer firms—those that succeeded in exporting products like wine, motorboats, or TV shows—often had entrepreneurs who had been embedded in the rich-country markets they targeted. This intimate understanding of market conditions and customer preferences was critical for their success.
ETRM: Thank you so much!
