Why do Indian and Mexican plants not grow?

When a business is successful, it grows. Successful businesses also are more likely to survive and thus old business tend to be larger. Now define business. The business unit relevant for this is difficult to ascertain, for example because of mergers and acquisitions, or simply because the boundaries of a firm are hard to establish (are contractors part of it? Subsidiaries?). Thus the common way to measure a business is at the plant level.

Chang-Tai Hsieh and Peter Klenow show that plants in India and Mexico do not grow with age, or much less than, say, the United States. This points to a very inefficient allocation of resources, as successful plants should invest to grow: they are obviously better than the competition, thus can produce more efficiently or better goods. With a simple simulation exercise, Hsieh and Klenow show that this lack of plant growth leads to a 25% productivity loss compared to US plant growth.

The question is of course why plant growth is stifled in India and Mexico. For India, it is rather obvious, with policies that favor small businesses and actively prevent them to grow "too large." Many of these policies, which are heavily promoted by owners of incumbent plants, are being revoked and can in part be credited for the large recent growth of the Indian economy. As for Mexico, it has been suggested that when plants grow from the informal to the formal sector of the economy, they are subject to more taxes and regulations. In both cases, inappropriate institutions are to blame.