Power constraints and firm-level total factor productivity in developing countries

This paper analyzes the effects of power outages and constraints on manufacturing firms’ revenue-based total factor productivity in developing countries. The empirical analysis is based on the World Bank Enterprise Surveys dataset for 84 countries for the period 2006–2019. The paper starts by showing statistically that firms facing power outages differ and operate in very different environments compared to firms not facing power outages, underlining a potential nonrandom issue relating to the treatment variable. A matching-based approach is designed to contain this type of bias. It shows that power outages reduce firm-level revenue-based total factor productivity, with average productivity 11% lower for exposed firms compared to unexposed firms. Our results, robust to several tests, reveal some heterogeneity, particularly with regard to the level of development, country income group, and geographical location. In addition to the effects on productivity, the analyses highlight that power outages reduce business expansion, captured by sales growth, and employment. Moreover, we show that this effect is mitigated for firms with R&D activities and those equipped with backup power generators. Finally, transmission channel tests indicate that the negative effect of power outages on productivity is mainly driven by capacity utilization reduction and higher sales losses. •We analyze the effects of power constraints on manufacturing firms’ TFPR.•Statistically, the power constraints treatment variable is not random for the firms.•Power constraints negatively and significantly affect firm-level TFPR.•Average productivity 11% lower for exposed firms compared to unexposed firms.•The acquisition of backup generators or investment in R&D mitigates this effect.