PLURALIZACIÓN: MERCADO Y CONSUMO

This section presents the different theories which explain how a firm increases productivity. The theories discuss various determinants of high profit in a firm.

2.3.1 The O- Ring Theory

This is a theory that was proposed by Kremer (1993). The author proposed a model that dictates the productive efficiency of skill matching. Total product of

the firm is maximized by employing skilled workers and pairing those with similar skills. The theory shows that highly skilled workers, will be matched together in equilibrium, and that wages and output will rise steeply in skill. The model is consistent with large income differences between countries, the predominance of small firms in poor countries, and positive correlation between the wages of workers in different occupations. The imperfect observability of skill leads to imperfect matching and thus to spillovers. The O ring production function is represented as shown in equation 2.1.

 



where n is the number of tasks to be undertaken to complete a product, Y is the level of output , K is capital and q is the level of skill required to accomplish each of n tasks. B is a multiplier term that depends on the characteristics of the firm. The important implication of this production function is positive assortative matching. This can be observed through a hypothetical four person economy with low skilled workers (q_L) and two highly skilled workers (q_H). This equation dictates the productive efficiency of skill matching as shown in equation 2.2

L H L

H q q q

q2  2 2 ……… 2.2

The positive externalities generated by the interaction of highly skilled workers make it advantageous and affordable for a firm with highly skilled workers in most of its tasks to hire highly skilled workers for the remaining tasks. Such firms,

therefore offer to pay more in order to attract highly skilled workers. Hence displacement of low skilled workers from the firms with high capacity to pay becomes a natural consequence of the sorting process.

2.3.2 Firm Size and Productivity Differential Theory

This theory was developed by Rajeev (1999). It postulates that smaller firms exhibit a higher profit rate even though they have lower survival probability and have difficulties in accessing the capital market. The author suggested that profit rates for larger firms are much lower than those of small firms even though large firms with market power and easier availability of capital are expected to maximize their profit advantage. The size, proxies capital markets access, making small firms the most likely to face financing constraints in the sense that they pay a higher interest rate on borrowed loan and this makes them to get a smaller loan size than they desire.

However, the higher productivity or efficiency of smaller firms is the result of their organizational structure that allows them to take strategic actions to exploit emerging movement opportunities and to create a niche market for themselves. Thus small firms utilizing their greater organizational responsiveness are better at adapting to environmental challenges than large firms. Managers of small firms are more of risk takers, making them open to adoption of innovations. They are also better organized to respond to the changing market structure and consumer

tastes that shift production away from standardized mass produced goods towards personalized products

2.3.3 Theory of Labour Diversity.

Diverse labour force is increasingly becoming a reality in many developing countries. According to Osborne (2000), diverse labour force in terms of age, gender, ethnicity and skills leads to an increase in productivity of the firm. From the demand side, there is increasing diversity across many working places and there is importance of further internationalization and demographic diversification. In many countries, firms’ hiring decision are affected by government affirmative action policies. Besides the fact that firms are often under pressure to be more diverse because this is how they should socially look, firms are challenged by constantly changing demand for goods and services, new customers and markets in today’s globalized world.

The diverse workforce may be a key factor in helping firms to understand and to meet the new needs. Osborne hypothesized that diversity can be beneficial to a firms’ performance due to better decision making, improved problem solving, more creativity, innovation and more about global products and markets. Hence this enhances a firm’s ability to compete in national and global markets.

In addition, Osborne (2000) argues that workforce diversity may actually contribute to the production of a higher quality or unique product. This profit maximization may lead to workforce diversity if a firm sells its product in many markets, and the product has multiple characteristics that are valued differently in the different markets.The firm will optimize its workforce diversity with respect to “the product’s characteristics, the extent to which different markets value them, and the extent to which (demographically diverse) groups inherently differ in their capacity to provide” these characteristics.