nep-bec New Economics Papers
on Business Economics
Issue of 2015‒07‒11
fifteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Agency, Firm Growth, and Managerial Turnover By Ronald W. Anderson; Cecilia Bustamante; Stéphane Guibaud
  2. Capital market financing, firm growth, and firm size distribution By Didier Brandao,Tatiana; Levine,Ross Eric; Schmukler,Sergio L.
  3. Firming up inequality By Jae Song; David J. Price; Fatih Guvenen; Nick Bloom
  4. Immigration, trade and productivity in services: evidence from UK firms By Gianmarco I. P. Ottaviano; Giovanni Peri; Greg C. Wright
  5. Innovation trade and the size of exporting firms By Letizia Montinari; Massimo Riccabonii; Stefano Schiavo
  6. Management Quality, Firm Organization and International Trade By Cheng Chen
  7. Exchange rate fluctuations and the margins of exports By Richard Fabling; Lynda Sanderson
  8. The Role of Foreign Networks for Firm Export of Services By Hatzigeorgiou, Andreas; Lodefalk, Magnus
  9. Pyramid capitalism : political connections, regulation, and firm productivity in Egypt By Diwan,Ishac; Keefer,Philip E.; Schiffbauer,Marc Tobias
  10. Endogenously Procyclical Liquidity, Capital Reallocation, and q By Shouyong Shi; Melanie Cao
  11. Seniority Wages and the Role of Firms in Retirement By Wolfgang Frimmel , Thomas Horvath, Mario Schnalzenberger, Rudolf Winter-Ebmer
  12. Strategic Decisions of Heterogeneous European Firms in a Multicountry Framework By Marti, Josep; Alguacil, Maite; Orts, Vicente
  13. Market Structure and Entry: Evidence from the intermediate goods market By NISHITATENO Shuhei
  14. European Unification Based on Flexibility and Diversity By Bruno S. Frey
  15. Cross-country evidence on start-up dynamics By Flavio Calvino; Chiara Criscuolo; Carlo Menon

  1. By: Ronald W. Anderson (London School of Economics and Political Science (LSE)); Cecilia Bustamante (London School of Economics and Political Science (LSE)); Stéphane Guibaud (London School of Economics and Political Science (LSE))
    Abstract: We study managerial incentive provision under moral hazard in a firm subject to stochastic growth opportunities. In our model, managers are dismissed after poor performance, but also when an alternative manager is better able to grow the firm. The optimal contract may involve managerial entrenchment, such that growth opportunities are foregone after good performance. Firms with better growth prospects have higher managerial turnover and more front-loaded compensation. The use of golden parachutes is suboptimal, unless the firm needs to incentivize its managers to truthfully report the arrival of growth opportunities. By ignoring the externality of the dismissal policy onto future managers, the optimal contract may imply excessive retention.
    Keywords: Agency; Firm growth; Managerial turnover
    Date: 2013–12
  2. By: Didier Brandao,Tatiana; Levine,Ross Eric; Schmukler,Sergio L.
    Abstract: How many and which firms issue equity and bonds in domestic and international markets, how do these firms grow relative to non-issuing firms, and how does firm performance vary along the firm size distribution? To evaluate these questions, a new data set is constructed by matching data on firm-level capital raising activity with balance sheet data for 45,527 listed firms in 51 countries. Three main patterns emerge from the analysis. (1) Only a few large firms issue equity or bonds, and among them a small subset has raised a large proportion of the funds raised during the 1990s and 2000s. (2) Issuers grow faster than non-issuers in assets, sales, and employment, that is, firms do not simply use securities markets to adjust their financial accounts. (3) The firm size distribution of issuers evolves differently from that of non-issuers, tightening among issuers and widening among non-issuers.
    Keywords: Access to Finance,Economic Theory&Research,Debt Markets,Microfinance,Emerging Markets
    Date: 2015–07–02
  3. By: Jae Song; David J. Price; Fatih Guvenen; Nick Bloom
    Abstract: Earnings inequality in the United States has increased rapidly over the last three decades, but little is known about the role of firms in this trend. For example, how much of the rise in earnings inequality can be attributed to rising dispersion between firms in the average wages they pay, and how much is due to rising wage dispersion among workers within firms? Similarly, how did rising inequality affect the wage earnings of different types of workers working for the same employer—men vs. women, young vs. old, new hires vs. senior employees, and so on? To address questions like these, we begin by constructing a matched employer-employee data set for the United States using administrative records. Covering all U.S. firms between 1978 to 2012, we show that virtually all of the rise in earnings dispersion between workers is accounted for by increasing dispersion in average wages paid by the employers of these individuals. In contrast, pay differences within employers have remained virtually unchanged, a finding that is robust across industries, geographical regions, and firm size groups. Furthermore, the wage gap between the most highly paid employees within these firms (CEOs and high level executives) and the average employee has increased only by a small amount, refuting oft-made claims that such widening gaps account for a large fraction of rising inequality in the population.
    Keywords: Inequality; productivity and firms
    JEL: M1 O2
    Date: 2015–05
  4. By: Gianmarco I. P. Ottaviano; Giovanni Peri; Greg C. Wright
    Abstract: This paper explores the impact of immigrants on the imports, exports and productivity of serviceproducing firms in the U.K. Immigrants may substitute for imported intermediate inputs (offshore production) and they may impact the productivity of the firm as well as its export behavior. The first effect can be understood as the re-assignment of offshore productive tasks to immigrant workers. The second can be seen as a productivity or cost cutting effect due to immigration, and the third as the effect of immigrants on specific bilateral trade costs. We test the predictions of our model using differences in immigrant inflows across U.K. labor markets, instrumented with an enclave-based instrument that distinguishes between aggregate and bilateral immigration, as well as immigrant diversity. We find that immigrants increase overall productivity in service-producing firms, revealing a cost cutting impact on these firms. Immigrants also reduce the extent of country-specific offshoring, consistent with a reallocation of tasks and, finally, they increase country-specific exports, implying an important role in reducing communication and trade costs for services.
    Keywords: Immigration; services trade
    JEL: F10 F16 F22 F23
    Date: 2015–05
  5. By: Letizia Montinari (Institute for Prospective Technological Studies (JRC-IPTS)); Massimo Riccabonii (Insititute for advanced studies Lucca); Stefano Schiavo (Department of Economic Geography)
    Abstract: This paper contributes to the literature explaining firm-level heterogenenity in the extensive margin of trade, defined as the number of products exported by each firm. We develop a model where firms must invest in R&D to maintain and increase their portfolio of goods: the process of product innovation by new and incumbent firms is such that the probability to capture new products is a function of the number of varieties already exported. This mechanism, together with the entry/exit dynamics that characterize the economy, gives rise to a Pareto distribution for the number of products exported by each firm. On the other hand, we model export sales as depending on exogenous preference shocks on the demand side, which leads to a lognormal distribution for the intensive margin of trade. Both predictions are consistent with a number of empirical findings recently emerged in the literature; this paper provides additional evidence based on a large dataset of French firms. Finally, a simple extension to the model allows us to derive some interesting insights on the behavior of multi-products firms: sales of different products across destinations are not uncorrelated, but show a rather strict hierarchy.
    Keywords: International trade; Extensive margin; Innovation; Preferential attachment; Multi-product firms
    JEL: F14 F43 L11 O3
    Date: 2013–09
  6. By: Cheng Chen (The University of Hong Kong)
    Abstract: The quality of management technology that is used to monitor and incentivize workers varies substantially across countries. To understand the impact of this on economic activities, I develop a two-sector model in which firms facing heterogeneous demands set up hierarchies to manage the production processes in a monopolistically competitive sector. Entrepreneurs decide the number of hierarchical layers, the effort level of each worker, and the span of control of supervisors. I then use the theory to explain two empirical findings established in the literature. First, a common improvement in this type of management technology across all firms intensifies competition in the monopolistically competitive sector. As a result, the smallest firms are forced to leave the market; the most efficient firms thrive; the average firm size increases. Second, firms are less decentralized in economies with ineffective management technology. In an extended two-country model incorporating international trade, I show that firms facing increasing import competition flatten their hierarchies and use more incentive-based pay. Furthermore, I find that countries with superior management technology experience larger welfare gains from opening up to trade and have larger trade shares.
    Date: 2015
  7. By: Richard Fabling (Motu Economic and Public Policy Research); Lynda Sanderson (New Zealand Treasury)
    Abstract: This paper examines the relationship between exchange rate fluctuations and New Zealand export performance. To isolate the impact of the exchange rate, as opposed to contemporaneous (and related) fluctuations in New Zealand’s economic performance or overseas market characteristics, we focus on bilateral export relationships at the firm level and control for both time-invariant country characteristics and changes in aggregate economic conditions. We examine two key margins of export adjustment – the probability of exporting (the extensive margin) and the average value of exports per firm (the intensive margin) – and distinguish between impacts on market incumbents and new or potential entrants. Finally, we specifically take account of the potential for interaction between the level and volatility of the exchange rate to affect exporting, as implied by theories of exchange rate hysteresis.
    Keywords: Margins of exports, Hysteresis, Exchange rates
    JEL: D22 F14 F31
    Date: 2015–05
  8. By: Hatzigeorgiou, Andreas (The Ratio Institute); Lodefalk, Magnus (Örebro University School of Business)
    Abstract: This study formalizes the idea that that the world can become ‘smaller’ through firms’ strategic trade-related decisions. We investigate whether firm investment in obtaining access to foreign networks impacts exports of services by estimating a fixed effects panel model on a comprehensive firm-level dataset for Sweden. In particular, we examine investment in links through the hiring of immigrants. Because trade barriers are higher for services than for goods, and because trade in services is more sensitive to informal trade barriers, firm investment in access to foreign networks could especially help to increase services exports. However, investment in foreign links could benefit overall access within the same cluster of firms, which reduces the incentive for an individual firm to invest in such linkages itself. The novel results suggest a positive and significant influence of firm investment in foreign networks – through the hiring of foreign-born workers – on both the propensity to export services as well as the intensity of exports. Instrumental variable estimation mitigates endogeneity concerns. Weaker export experience enhances the role of investment in foreign networks in terms of the propensity to export. The skill level of foreignborn workers and the time that has elapsed since immigration also impact the degree to which firms can utilize investment in foreign-born personnel to gain access to networks abroad. Our findings provide a new understanding of how firms can overcome trade barriers that specifically impede services by investing in foreign networks, such as through hiring foreign-born personnel, and emphasize the role of foreign-born population to promote services exports.
    Keywords: networks; firms; trade; services; immigration
    JEL: D80 F10 F22 J61 L14
    Date: 2015–06–29
  9. By: Diwan,Ishac; Keefer,Philip E.; Schiffbauer,Marc Tobias
    Abstract: This paper uses an original database of 469 politically connected firms under the Mubarak regime in Egypt to explore the economic effects of close state-business relations. Previous research has shown that political connections are lucrative. The paper addresses several questions raised by this research. Do connected firms receive favorable regulatory treatment? They do: connected firms are more likely to benefit from trade protection, energy subsidies, access to land, and regulatory enforcement. Does regulatory capture account for the high value of connected firms? In the sample, regulatory capture as revealed by energy subsidies and trade protection account for the higher profits of politically connected firms. Do politically connected firms hurt aggregate growth? The paper identifies the growth effects of the entry of politically connected firms by comparing detailed 4-digit sectors where they entered, between 1996 and 2006, and sectors that remained unconnected. The entry of connected firms into new, modern, and previously unconnected sectors slows aggregate employment growth and skews the distribution of employment toward less productive, smaller firms.
    Keywords: E-Business,Small Scale Enterprises,Economic Theory&Research,Banks&Banking Reform,Microfinance
    Date: 2015–07–02
  10. By: Shouyong Shi (Pennsylvania State University); Melanie Cao
    Abstract: By analyzing a stochastic equilibrium with endogenous liquidity in the capital market, this paper explains the puzzling fact that capital reallocation across firms is procyclical while dispersion in Tobin's q across firms is acyclical or counter cyclical. Capital is reallocated across firms through a frictional market modeled by search and matching. The market tightness captures liquidity in this market and is endogenously determined as buyers choose whether to enter the market. Capital creation is also endogenous as capital makers choose whether to incur a cost to make capital. When aggregate productivity increases, more capital is created. At the same time, more buyers enter the capital market to buy capital in an attempt to capture the increased value of a productive firm. As a result, market liquidity increases and more capital is reallocated. The price of capital increases, which increases q of low-value firms and reduces q of high-value firms. The mean and standard deviation in q across firms respond ambiguously to an increase in aggregate productivity. These results are robust to the addition of heterogeneity in firm-specific productivity.
    Date: 2015
  11. By: Wolfgang Frimmel , Thomas Horvath, Mario Schnalzenberger, Rudolf Winter-Ebmer
    Abstract: In general, retirement is seen as a pure labor supply phenomenon, but firms can have strong incentives to send expensive older workers into retirement. Based on the seniority wage model developed by Lazear (1979), we discuss steep seniority wage profiles as incentives for firms to dismiss older workers before retirement. Conditional on individual retirement incentives, e.g., social security wealth or health status, the steepness of the wage profile will have different incentives for workers as compared to firms when it comes to the retirement date. Using an instrumental variable approach to account for selection of workers in our firms and for reverse causality, we find that firms with higher labor costs for older workers are associated with lower job exit age.
    Keywords: retirement, seniority wages, firm incentives
    JEL: J14 J26 J31 H55
    Date: 2015–07
  12. By: Marti, Josep; Alguacil, Maite; Orts, Vicente
    Abstract: This paper examines the relationship between firms’ heterogeneity and the internationalization decision regarding the number of markets served through both exports and FDI. Theoretically, we base on Helpman et al. (2004) and Yeaple (2009) as a basic framework for understanding this connection. For the empirical analysis, we use firm-level information of manufacturing firms from seven EU countries, as collected in the EFIGE dataset. Two different methodologies have been employed in this study: first, in order to evaluate how firms’ heterogeneity (related with productivity, size, R&D, years of establishment, centralized decision making, human and physical capital intensity), influences the decision to expand exports or foreign production beyond to a single foreign market, we estimate a multinomial logit model. The outcomes show that the increasing complexity in the internationalization strategies of multinationals is not independent of the different characteristics of the firms involved. Second, to determine the extent to which changes in firms’ characteristics influence the number of foreign markets to be attended through exports or foreign direct investment, we estimate a quantile regression model. Our estimates confirm the significant role of firm heterogeneity on the scope of international activities. However, different results across quantiles are obtained, suggesting the existence of heterogeneous effects and non-linearities among the whole distribution of the number of foreign markets served.
    Keywords: Firm heterogeneity; Internationalization strategy; Export; FDI
    JEL: D24 F14 F21 F23
    Date: 2015–07
  13. By: NISHITATENO Shuhei
    Abstract: The question of whether incumbent firms could deter new entrants in a more concentrated market has been a major concern by both antitrust authorities and industrial economists. This study is the first attempt to analyze the relationship between the market structure and entry in the intermediate goods market, utilizing unique data on auto parts transactions between automakers and auto parts suppliers in Japan during the period 1990-2010. The results suggest that there exists a U-shaped relationship between market concentration and entry, which sees entry decreasing and then increasing as markets concentrate. This result could emanate from a significant role of multi-product and multi-customer firms.
    Date: 2015–07
  14. By: Bruno S. Frey
    Date: 2015–07
  15. By: Flavio Calvino; Chiara Criscuolo; Carlo Menon
    Abstract: The report provides a description of start-up dynamics exploiting the richness of the recently collected DynEmp v.2 database. The contribution of new firms in terms of new jobs to the existing workforce can be expressed as a combination of four different elements: the start-up rate; the average size of firms at point of entry; the survival rate; and the average growth rate of survivors. This decomposition shows that the four elements interplay in very different ways, even across economies with similar aggregate start-up contributions. The most homogenous component across countries is the survival rate, which is equal to just above 60% after three years from entry, to about 50% after five years, and to just over 40% after seven years. Furthermore, in most countries the probability of exiting is highest at the age of two, and decreases (linearly) beyond that age. When looking at employment growth of surviving businesses, it is found that the large majority of surviving micro start-ups do not grow; however, the tiny proportion of small start-ups which do grow creates a disproportionate amount of jobs.
    Keywords: entrepreneurship, start-ups, firm demographics, employment dynamics
    JEL: D22 L11 L26
    Date: 2015–07–03

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