_23_ _Ways Out of Poverty - Diffusing Best Practices and Creatinz Capabilities_ Field research has shown that the reason why businessespstay<sup>informal and landownersdo not</sup> register their property is not so much because they have to pay taxes but because<sup>they are usually</sup> hindered by the bureaucracy. For example, de Soto and a team of<sup>his researcherstriedto registera</sup> one-man clothing workshop that they had set up outside Lima, Peru. It took 289<sup>days,involving</sup> many hours of filling forms, traveling by bus into central Lima,<sup>and queuingup to seethe relevant</sup> officials, to register their micro-enterprise. The whole operation cost $1,231 -<sup>31times the</sup> monthly minimum wage in Peru.

In Malawi, houses are built on "customary" land, i.e. land that the residents have<sup>noformaltitle to</sup> but that has been cultivated by their family for generations. The<sup>villagechief usuallyoverseesany</sup> disputes about boundaries. If a family breaks the rules of<sup>the tribeor leavesthe property</sup> unattended, the chief has the power to take the land away and give it to someone else.<sup>The contract</sup> may be oral, or it may be written and signed by the chief. The problem is that<sup>no bankwill accept</sup> it as a collateral. The land and the property built on it turns out to be what<sup>Hemandode Soto calls</sup> "dead" capital.

All rich industrialized countries have clear, enforceable and almost<sup>inclusiveproperty rights.</sup> Although better property laws are not the only reason why some countries are<sup>better off than</sup> others, de Soto insists that they make a significant difference.

Source: De Soto (2000).

**Internal growth.** Productivity growth comes not only from entry and exit,<sup>but alsofrom</sup> the growth of existing firms responding to market incentives. Some of the new<sup>entrants</sup> turn out to be successful and the best become large firms.<sup>5 2</sup> Productivity growth<sup>also</sup> comes from large firms branching out and entering new markets, sometimes<sup>through</sup> mergers and acquisitions of promising firms. As good firms become large they tend on average to have higher productivity than small firms. But the highest growth rates<sup>are</sup> found among small companies that happen to be particularly efficient. Firms<sup>are</sup> productive not because they have a particular size but because they<sup>aregood.5 3</sup>

In a new industry, small firms play the prime role in innovation and<sup>productivity</sup> development (box 4). The good firms continue to improve through internal<sup>growth,</sup> taking over less well-managed companies or buying up promising small firms that<sup>need</sup> capital.<sup>5 4</sup> Once firms have proven themselves and become large, they remain<sup>more</sup> productive and last much longer than the average smaller firm. Indeed, many<sup>large firms</sup> are like collections of small ones. They operate an internal market for corporate<sup>control,</sup> which can be superior to that of the broader market. And they owe their success<sup>to their</sup> ability to allocate people, capital, ideas, and assets better than firms operating<sup>at arms-</sup> length from each other.<sup>5 5</sup> But, there is no guarantee, and large firms may<sup>also fail</sup> eventually.

> 52 Rajan and Zingales, 1998.

" Aw, 2001.

54 Ravenscraft and Scherer, 1987.

55 Hellwig, 2000; Klein, 2000.