The Missing “Missing Middle”

T he notion that the distribution of firm size in poor countries is characterized by a bimodal distribution with a “missing middle” is a widely accepted fact in development economics (for example, see Krueger 2013). The idea of the missing middle is that there are a large number of small firms, some large firms, but very few medium-sized firms. The purported fact about the missing middle is cited as evidence for two broad stories of why many countries are poor. Perhaps surprisingly, these models look for the cause of the missing middle in two fundamentally different places. One approach suggests that small firms are disfavored in low-income countries— for example, by a lack of access to financial capital—and thus face difficulties in growing to become middle-sized firms. The other approach posits a “dual economy” of large high-productivity firms and small low-productivity firms, and then suggests that larger firms are disfavored in low-income countries—for example, by having to bear large fixed costs of regulation—which make it difficult for middle-sized firms to become established. We begin by reviewing these theories of development based on the purported fact of a “missing middle.” We then explore the evidence on distribution of firm sizes in more detail and challenge the presumption that a “missing middle” occurs at all. We present three main facts. First, there is in fact no evidence of a missing middle in detailed and comprehensive data on the size of manufacturing firms in India, Indonesia, or Mexico, regardless of how we slice the data. To be sure, there The Missing “Missing Middle” †