CORPORATE PROFITABILITY AND THE DYNAMICS OF COMPETITION IN EMERGING MARKETS: A TIME SERIES ANALYSIS* Jack Glen, Kevin Lee and Ajit Singh The paper presents time-series analyses of corporate profitability in seven leading developing countries (DCs) using the common methodology of the persistence of profitability (PP) studies and systematically compares the results with those for advanced countries (ACs). Surprisingly, both short and long-term persistence of profitability for DCs are found to be lower than those for ACs. The paper concentrates on economic explanations for these findings. It also reports the results on the persistence of the two components of profitability – output-capital ratios and profit margins. These too raise important general issues of economic interpretation for PP studies which are outlined. This paper examines the dynamics of the competition process in product markets in emerging economies empirically, using the common methodology of ‘the persistency of profitability’ (PP) studies in industrial organisation. This meth- odology has been applied extensively, mainly to advanced countries (ACs). 1 Time- series analyses of profitability persistence in seven leading developing countries (DCs), Brazil, India, Jordan, Korea, Malaysia, Mexico and Zimbabwe are reported here for 339 firms generally spanning the period 1980 to 1995. The paper is a sequel to Glen, Lee and Singh (2001), henceforth GLS, which suggested that the persistency coefficients for the above sample DCs were generally smaller than those observed for ACs. 2 This could normally be taken to indicate that the intensity of competition in DCs is more, and certainly not less, than that observed for the latter countries. It is a counterintuitive finding as DC markets are conventionally regarded as lacking in competition. As Singh (2003) notes, there is prima facie a solid basis for such thinking. There are many structural factors which are inimical to competition in DCs including government created barriers to entry and exit, small and segmented markets, infra-structural and transportation deficits. These raise the question whether the persistency results for DCs need a different economic interpretation from those for ACs. A satisfactory answer to this question would requires a full discussion of all the parameters of the reduced form auto- * The authors are grateful to John Cable, Dennis Mueller, Rob Mason, Hiro Ogadiri and to two anonymous referees for helpful comments. Financial support from the Research Committee of the World Bank is gratefully acknowledged, as is the contribution of the Centre for Business Research, Cambridge where this project was carried out. The usual caveat applies. 1 PP studies for industrial countries include Mueller’s pioneering 1986 and 1990 contributions for the US, and those of Waring (1996) and McGahan and Porter (1999); for the UK these include Cubbin and Geroski (1987, 1990) and Goddard and Wilson (1999); for Canada, Khemani and Shapiro (1990); for France, Jenny and Weber (1990); for Japan, Odagiri and Yamawaki (1990) and Maruyama and Odagiri (forthcoming); for Germany, Schwalbach and Mahmood (1990). As explained in Singh (2003), in more general terms PP studies may be regarded as a part of a larger research programme on the stochastic modelling of the firm and the evolution of markets overtime. 2 Other DC studies are Kambhampati (1995) for India and Yurtoglu (2000) for Turkey. The Economic Journal, 113 (November), F465–F484. Ó Royal Economic Society 2003. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. [ F465 ]