nep-bec New Economics Papers
on Business Economics
Issue of 2016‒03‒06
nineteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. How Did Young Firms Fare During the Great Recession? Evidence from the Kauffman Firm Survey By Zarutskie, Rebecca; Yang, Tiantian
  2. Skills, Tasks and the Scarcity of Talent in a Global Economy By Michael Koch
  3. Internationalization of European mobile telecommunication operators: institutional diversity and performance implications By Asimakopoulos, Grigorios; Hernández, Virginia; Whalley, Jason
  4. The Effect of Trade Liberalization on Firm-Level Profits: An Event-Study Approach By Holger Breinlich
  5. Availability of business services and outward investment: Evidence from French firms By Görg, Holger; Jabbour, Liza
  6. Endogenous firm competition and the cyclicality of markups By Afrouzi, Hassan
  7. Post Reunification Economic Fluctuations in Germany: A Real Business Cycle Interpretation By Michael Flor
  8. Audit fees, Non-audit fees and Coporate Performance By Cinderela Andrade dos Santos; António Cerqueira; Elísio Brandão
  9. Mobile and more productive? Firm-level evidence on the productivity effects of mobile internet use By Bertschek, Irene; Niebel, Thomas
  10. Institutional Distance and Foreign Direct Investment By Rafael Cezar; Octavio Escobar
  11. Farmer Participation, Entry and Exit decisions in the Italian Crop Insurance Program By Santeramo, Fabio Gaetano; Adinolfi, Felice; Capitanio, Fabian; Goodwin, Barry K.
  12. What's so special about specialization in the euro area? By Mongelli, Francesco Paolo; Reinhold, Elisa; Papadopoulos, Georgios
  13. FDI and Heterogeneous Firms: Evidence from BRIC Countries By Valeria, Gattai; Rajssa, Mechelli; Piergiovanna, Natale
  14. Productivity distributions in New Zealand: The dangers of international comparison By Richard Fabling; Lynda Sanderson
  15. How wages are set: evidence from a large survey of firms By Jed Armstrong; Miles Parker
  16. The Bright Side of Financial Derivatives: Options Trading and Firm Innovation By Blanco, Iván; Wehrheim, David
  17. The Impact of Demand Shocks on Firm-Level Offshoring Behavior: Theory and Evidence By Tan, Yong; Shao, Yuchen
  18. The role of networks in firms’ multi-characteristics competition and market-share inequality By Lapatinas, Athanasios; Garas, Antonios

  1. By: Zarutskie, Rebecca (Board of Governors of the Federal Reserve System (U.S.)); Yang, Tiantian (Duke University)
    Abstract: We examine the evolution of several key firm economic and financial variables in the years surrounding and during the Great Recession using the Kauffman Firm Survey, a large panel of young firms founded in 2004 and surveyed for eight consecutive years. We find that these young firms experienced slower growth in revenues, employment, and assets and faced tighter financing conditions during the recessionary years. While we find some evidence that firm growth picked up following the recession, it is not clear that it returned to the levels it would have been absent the recessionary shock. We find little evidence that financing conditions for young firms loosened following the recession and show that financing constraints, in addition to diminished demand, may have contributed to these firms' slower growth. We discuss the strengths and the limitations of the Kauffman Firm Survey in measuring the impact of the Great Recession on young firms and their founders and consider features of future data collection and measurement efforts that would be useful in studying entrepreneurial activity over the business cycle.
    Keywords: Entrepreneurship; Financing constraints; Firm performance; Great Recession; Young firms
    Date: 2015–09–23
  2. By: Michael Koch
    Abstract: The scarcity of talent is a tremendous challenge for firms in the globalized world. This paper investigates the role of labor market imperfection in open economies for the usage of talent in the production process of firms. For this purpose, I set up a heterogeneous firms model, where production consists of a continuum of tasks that differ in complexity. Firms hire low-skilled and high-skilled workers to perform these tasks. How firms assign workers to tasks depends on factor prices for the two skill types and the productivity advantage of high-skilled workers in the performance of complex tasks. I study the firms’ assignment problem under two labor market regimes, which capture the polar cases of fully flexible wages and a binding minimum wage for low-skilled workers. Since the minimum wage lowers the skill premium, it reduces the range of tasks performed by high-skilled workers, which increases firm-level productivity and reduces the mass of active firms. Whereas trade does not affect the firm-internal assignment of workers to tasks in a setting with fully flexible wages, it renders high-skilled workers a scarce resource and reduces the range of tasks performed by this skill type with negative consequences for firm-level productivity, if low-skilled wages are fixed by a minimum wage. In this case, trade leads to higher per-capita income for both skill types and thus to higher welfare in the open than in the closed economy, whereas – somewhat counter-intuitive – inequality between the two skill typesdecreases, as more low-skilled workers find employment in the production process.
    Keywords: scarcity of talent, firm-internal labor allocation, trade, minimum wages, heterogenous firms
    JEL: F12 F16
    Date: 2014–04
  3. By: Asimakopoulos, Grigorios; Hernández, Virginia; Whalley, Jason
    Abstract: Internationalisation plays a key role in the strategy of many firms, with one of the key benefits being improved performance. Since the early 1990s, internationalisation has played a central role within the mobile telecommunications industry, giving rise to multinational enterprises operating in multiple markets. In this paper we investigate whether the internationalisation that has occurred within the European mobile telecommunications industry has resulted in the improved performance of firms. We draw on data for 97 mobile network operators operating in 35 European countries covering the period 2003 to 2012 (inclusive). We adopt a Data Envelopment Analysis (DEA) approach to explore the relationship between firm performance and the regulatory development of countries. Our findings reveal that regulatory development does impact on firm performance, as does the extent to which markets are concentrated. We also reveal how regulatory diversity impacts on the performance of firms, and discuss the implications that arise..
    Keywords: internationalisation,mobile telecommunications,Europe,DEA
    Date: 2015
  4. By: Holger Breinlich
    Abstract: I use an event study approach to present novel evidence on the impact of trade liberalization on firm-level profits. Using the uncertainty surrounding the negotiation and ratification process of the Canada-United States Free Trade Agreement of 1989 (CUSFTA), I estimate the impact of different types of tariff reductions on the abnormal returns of Canadian manufacturing firms. I find that Canadian import tariff reductions lead to lower, and reductions in Canadian intermediate input tariffs to higher abnormal returns. The impact of U.S. tariff reductions is less clear and depends on the size of the affected firms. I also calculate the total profit increase implied by my estimates. Overall, CUSFTA increased per-period profits by around 1.2%. This was mainly driven by intermediate input tariff reductions which more than offset the negative effect of Canadian import tariff reductions.
    Keywords: Profitability, Trade Liberalization, Stock Market Event Studies, Canada-U.S. Free Trade Agreement
    JEL: F12 F14 G14
    Date: 2016–01
  5. By: Görg, Holger; Jabbour, Liza
    Abstract: This paper considers the link between the local availability of services and a firm's decision to become a multinational. This is a highly topical issue, given that many industrialised countries are increasingly becoming services economies and firms become increasingly more globalised. In an analysis of rich firm level data for France we find evidence that the availability of services in the home country indeed has a positive impact on firms' decisions to become multinationals. This is robust to endogeneity concerns. The result can be interpreted in a simple set up where the local availability of business services improves firm efficiency and, hence, allows firms to overcome sunk costs of investing abroad more easily.
    Keywords: Business Services,Foreign Direct Investment,Multinationals
    JEL: F23 R11
    Date: 2015
  6. By: Afrouzi, Hassan (The University of Texas at Austin)
    Abstract: The cyclicality of markups is crucial to understanding the propagation of shocks and the size of multipliers. I show that the degree of inertia in the response of output to shocks can reverse the cyclicality of markups within implicit collusion and customer-base models. In both classes of models, markups follow a forward looking law of motion in which they depend on firms' conditional expectations over stochastic discount rates and changes in output, implying that auxiliary assumptions that affect the inertia of output can potentially reverse cyclicality of markups in each of these models. I test this common law of motion with data for firms' expectations from New Zealand and find that firms' markup setting behavior is more consistent with implicit collusion models than customer base models. Calibrating an implicit collusion model to the U.S. data, I find that markups are procyclical if there is inertia in the response of output to shocks, as commonly found in the data.
    JEL: D21 D92 E3
    Date: 2016–02–01
  7. By: Michael Flor
    Abstract: We consider the cyclical properties of the German economy prior and after reunication in 1990 from the perspective of a real business cycle model. The model provides the framework for the selection and consistent measurement of the variables whose time series properties characterize the cycle. Simulations of the calibrated model reveal the model's potential to interpret the data. Major findings are that: i) the volatility of most aggregate time series has not changed significantly between the two time periods, ii) despite many conceptual differences between the European and the U.S. System of Accounts, the calibrated parameter values for the German economy are within the range of values usually employed in the real business cycle literature, iii) the model is closer to the data for the time period prior to reunication.
    Keywords: Macroeconomic Data, Measurement and Data on National Income and Product Accounts, Economic Fluctuations, Real Business Cycles
    JEL: C82 E01 E32
    Date: 2014–04
  8. By: Cinderela Andrade dos Santos (FEP-UP, School of Economics and Management, University of Porto); António Cerqueira (FEP-UP, School of Economics and Management, University of Porto); Elísio Brandão (FEP-UP, School of Economics and Management, University of Porto)
    Abstract: Our research examines whether audit and non-audit fees are associated with firm performance, so, we study this relationship taking into account the impact of operating and corporate governance characteristics on firm performance. The sample in study is non-financial firms in S&P 500 covering the period from 2002 to 2014. We find a significant negative relationship between corporate performance and non-audit fees. This suggests that the increase (decrease) in corporate performance is related to the decrease (increase) in non-audit fees. The results add to the growing body of literature documenting relations between firm performance and remuneration of audit services, as well as to our understanding of the determinants of corporate performance. Furthermore, this study highlights the possible matter of providing non-audit services jointly with audit services, confine the functions of an auditor and consequently compromise the independence, that ultimately decrease the firm performance.
    Keywords: Audit Fees, Non-Audit Fees, Corporate Performance, Corporate Governance
    JEL: G30 M42
    Date: 2016–02
  9. By: Bertschek, Irene; Niebel, Thomas
    Abstract: Mobile internet access allows for flexibility with respect to working time and working place. We analyse whether employees' use of mobile internet access improves firms' labour productivity. Our data set contains 2143 German firms and refers to the year 2014, when high-speed mobile internet was still at a relatively early stage of diffusion within firms. The econometric analysis shows that firms' labour productivity significantly increases with the share of employees with mobile internet access. Our instrumental variables approach reveals that mobile internet use does cause higher labour productivity.
    Keywords: Mobile Internet,Labour Productivity,Firm-Level Data
    JEL: D22 L20 O33
    Date: 2015
  10. By: Rafael Cezar (Banque de France - Direction de la Recherche, DIAL - Développement, institutions et analyses de long terme - Institut de recherche pour le développement [IRD]); Octavio Escobar (School of Business - Adelphi University)
    Abstract: This paper studies the link between Foreign Direct Investment (FDI) and institutional distance. Using a heterogeneous firms framework, we develop a theoretical model to explain how institutional distance influences FDI and it is shown that institutional distance reduces both the likelihood that a firm will invest in a foreign country and the volume of investment it will undertake. We test our model, using inward and outward FDI data on OECD countries. The empirical results confirm the theory and indicate that FDI activity declines with institutional distance. In addition, we find that firms from developed economies adapt more easily to institutional distance than firms from developing economies.
    Keywords: Foreign Direct Investment,institutions,heterogeneous firms,gravity model
    Date: 2015
  11. By: Santeramo, Fabio Gaetano; Adinolfi, Felice; Capitanio, Fabian; Goodwin, Barry K.
    Abstract: The factors affecting the demand for agricultural insurance in the US have been extensively studied over the last two decades. However, the determinants of a farm’s entry and exit decisions in the insurance market have received relatively little attention. Turnover in the insurance book of business is an important issue in most private and public crop insurance plans. Moreover, insurance markets in the EU are still largely under-investigated. We investigate empirically the determinants of crop insurance participation in Italy. We show that the participation rate is high for large firms and that it is negatively correlated with crop diversification, which is itself a form of insurance. High premiums tend to inhibit both entry and exit from the insurance market. Larger and wealthier farms are more likely to adopt insurance and renew coverage over time. We discuss implications of our results for public intervention and the private industry. In particular, we demonstrate that the decision to drop coverage by an insured grower may differ significantly from the corresponding decision to enroll in an insurance program by an uninsured farmer. To the extent that policymakers want to encourage participation in subsidized crop insurance programs, education and outreach efforts toward uninsured farmers may differ substantially from those directed toward keeping insured farmers enrolled in the program. We investigate these differences.
    Keywords: Agricultural Policy, Risk Management, Insurance, Turnover
    JEL: D81 G22 Q12 Q14 Q18
    Date: 2016–01–30
  12. By: Mongelli, Francesco Paolo; Reinhold, Elisa; Papadopoulos, Georgios
    Abstract: Euro area countries exhibited modest convergence prior to the financial crisis and diverged thereafter. Such divergence has been examined from many angles, and various narratives of the crisis have developed. Surprisingly, the gradual transformation of the economic structures of euro area countries over the last 15-20 years has, however, received less attention. This paper brings together several strands of evidence - both macro and micro - on such economic transformation. It makes three contributions. First, profound changes are found in the allocation of countries’ resources across sectors as had been predicted prior to the launch of the euro. In some cases, transformation precedes the launch of the euro, such as the industrial sector, and might reflect different comparative advantages. Such specialisation is not problematic, and is generally accompanied by diverse risk sharing channels. Yet, the second contribution of this paper is to show instead that in some euro area countries productive resources were misallocated to less efficient and lower productivity sectors. In order to distinguish between good and bad specialisation, a firm-based database is examined. The third contribution shows that frictions play an important role in preventing the shift of resources towards more productive firms and thus reduce the potential growth of some countries. This might then explain in part the modest convergence and then divergence of euro area countries. JEL Classification: E01, F45, J21, O47
    Keywords: convergence, euro area, productivity, risk-sharing, specialisation
    Date: 2016–02
  13. By: Valeria, Gattai; Rajssa, Mechelli; Piergiovanna, Natale
    Abstract: This paper investigates the link between Outward Direct Investment (ODI) and the performance of BRIC firms. Drawing on firm-level data, we introduce a rich taxonomy of ODI that accounts for the decision to invest and the number, destination and ownership structure of foreign affiliates. Through different econometric models and specifications, we consistently demonstrate that BRIC firms engaged in ODI are in the minority, but they outperform domestic enterprises. Moreover, firms selecting less preferred ODI types outperform firms undertaking other ODI strategies.
    Keywords: ODI, FDI, Performance, BRIC, Firm-Level Data
    JEL: F23 L25 O57
    Date: 2016–01–18
  14. By: Richard Fabling (Motu Economic and Public Policy Research); Lynda Sanderson (The Treasury)
    Abstract: Recent discussions of New Zealand's relative economic performance have drawn a link between firm-level productivity dispersion and a lack of competitive pressure. This note describes a simple example using New Zealand firm-level data which casts doubt on the assertion that New Zealand has a “long tail” of low productivity firms relative to other countries.
    Keywords: Multifactor productivity (MFP), Dispersion
    JEL: D24
    Date: 2014–12
  15. By: Jed Armstrong; Miles Parker (Reserve Bank of New Zealand)
    Abstract: This paper studies the micro-foundations of wage dynamics in New Zealand, using a large behavioural survey. The majority of firms adjust wages annually, with smaller firms more likely to set wages less frequently. Firms have limited synchronicity in wage setting, with over half of firms reporting that they do not have a fixed month for wage changes. There are some links from inflation and minimum wage legislation to wage adjustments; in both cases the link is stronger as firm size increases.
    Date: 2016–02
  16. By: Blanco, Iván; Wehrheim, David
    Abstract: Do financial derivatives enhance or impede innovation? We aim to answer this question by examining the relationship between equity options markets and standard measures of firm innovation. Our baseline results show that firms with more options trading activity generate more patents and patent citations per dollar of R&D invested. We then investigate how more active options markets affect firms' innovation strategy. Our results suggest that firms with greater trading activity pursue a more creative, diverse and risky innovation strategy. We discuss potential underlying mechanisms and show that options appear to mitigate managerial career concerns that would induce managers to take actions that boost short-term performance measures. Finally, using several econometric specifications that try to account for the potential endogeneity of options trading, we argue that the positive effect of options trading on firm innovation is causal.
    Keywords: innovation, R&D productivity, options market, stock price efficiency, career concerns
    JEL: D81 G12 G14 G30 G38 O31 O32
    Date: 2016–02–04
  17. By: Tan, Yong; Shao, Yuchen
    Abstract: This paper extends the model of Antras et al.(2014) to disentangle the link between demand shocks and firm-level offshoring decisions. The model predicts that a positive demand shock increases the firm-level purchases of imported intermediates in both the extensive and intensive margins. Using a difference-in-difference approach, we examine the response of Chinese exporters to a quota removal on textile and clothing products, which is equivalent to a positive demand shock. The findings indicate that firms import more varieties and higher volumes of intermediates after the quota removal. The results are robust to different regression designs.
    Keywords: Intermediates Offshoring, Textile and Clothing, Demand Shock, Quota Removal
    JEL: F10 F14 L11
    Date: 2016–01
  18. By: Lapatinas, Athanasios; Garas, Antonios
    Abstract: We develop a location analysis spatial model of firms’ competition in multi-characteristics space, where consumers’ opinions about the firms’ products are distributed on multilayered networks. Firms do not compete on price but only on location upon the products’ multi-characteristics space, and they aim to attract the maximum number of consumers. Boundedly rational consumers have distinct ideal points/tastes over the possible available firm locations but, crucially, they are affected by the opinions of their neighbors. Our central argument is that the consolidation of a dense underlying consumers’ opinion network is the key for the firm to enlarge its market-share. Proposing a dynamic agent-based analysis on firms’ location choice we characterize multi-dimensional product differentiation competition as adaptive learning by firms’ managers and we argue that such a complex systems approach advances the analysis in alternative ways, beyond game-theoretic calculations.
    Keywords: location choice, networks, multi-characteristics space, networks; consumer behavior; decision heuristics; agent-based model;
    JEL: C63 C65 D72 L14 R39
    Date: 2016
  19. By: Uday Bhanu Sinha (Departments of Economics, Delhi School of Economics, University of Delhi, India)
    Abstract: We consider a mechanism for optimizing the value of a patent owned by an independent patent holder who is not a producer in the market. We consider two kinds of cost reducing innovations: “common innovation” and “new technology innovation” in a homogeneous good Cournot market with ex-ante asymmetric costs of production. We show that the value of the patent is maximized when the patent holder sells the patent to the efficient firm at a fixed payment who would further license the innovation to its rival. This patent sale dominates all other licensing mechanisms for both kinds of innovations.
    Keywords: Patent sale; licensing; asymmetric firms; cost reducing innovation; auction; fixed fee; royalty, two part tariff
    JEL: D43 D44 D45 L13 O32 O33
    Date: 2015–08

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