Abstract: We study the internal organization of firms in developing countries and how it affects their productivity and optimal size. We collect detailed timeuse data for 1,000 manufacturing firms in urban Uganda and document limitedwithin-firm labor specialization. Even in relatively large firms, entrepreneursand their employees work on similar tasks. As such, firms resemble a collectionof self-employed individuals who share a production location. To interpret theempirical evidence, we develop an equilibrium model of task assignment, firmsize, and occupational choice. We find that barriers to labor specialization gen-erate decreasing returns to scale at the firm level, which reduces the returns toentrepreneurial ability and keeps firms small in equilibrium. Given the internalorganization of firms we document, benefits from alleviating any other frictionsthat constrain firm growth are muted.
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