Structural constraints and excess capacity: An international comparison of manufacturing firms

Excess capacity results in real and opportunity costs as well as lower factor
productivity. Conventionally, variation in capacity utilisation rates has been
explained with reference to the business cycles and market imperfections. In
this article, we show that these two factors do not always fully explain the
causes of idle capacity. Our ndings suggest that manufacturing rms in
low-income countries tend to have lower capacity utilisation rates than
those in middle- and upper-middle-income groups. To explain this
peculiarity, it is proposed in this article that the level of excess capacity
partly depends on supply-side conditions and institutional variables. The
ndings provide strong support for this view and suggest that there are gains
to be made in the manufacturing industries of the lower-income countries
through improvements in the structural conditions.