nep-bec New Economics Papers
on Business Economics
Issue of 2018‒09‒03
eighteen papers chosen by
Vasileios Bougioukos
Bangor University

  1. Entrepreneurial Risk-Taking, Young Firm Dynamics, and Aggregate Implications By Joonkyu Choi
  2. Multiproduct Firms and the Business Cycle By Diyue Guo
  3. High-Growth Entrepreneurship By Brown, J. David; Earle, John S.; Kim, Mee Jung; Lee, Kyung Min
  4. A Search-Based Neoclassical Model of Capital Reallocation By Dong, Feng; Wang, Pengfei; Wen, Yi
  5. Hiring Expert Talent in a Recession: Targeted Labor Pool Sourcing and Firm Performance By Mawdsley, John Kenneth; Chauradia, Amit; Brymer, Rhett
  6. Aggregate Consequences of Credit Subsidy Policies: Firm Dynamics and Misallocation By In Hwan Jo; Tatsuro Senga
  7. Barriers to Entry and Regional Economic Growth in China By Loren Brandt; Gueorgui Kambourov; Kjetil Storesletten
  8. Does Market Competition Dampen Environmental Performance? Evidence from China By Duanmu, Jing-Lin; Bu, Maoliang; Pittman, Russell
  9. Role of Past Experience and Intra-firm Trade in FDI Decisions By Ivan DESEATNICOV; Konstantin KUCHERYAVYY
  10. Bribes vs. Taxes: Market Structure and Incentives By Amodio, Francesco; Choi, Jieun; De Giorgi, Giacomo; Rahman, Aminur
  11. Big Data in Finance and the Growth of Large Firms By Juliane Begenau; Laura Veldkamp; Maryam Farboodi
  12. Export Decision under Risk By De Sousa, José; Disdier, Anne-Célia; Gaigné, Carl
  13. Firm Entry and Exit and Aggregate Growth By Jose Asturias; Kim Ruhl; Sewon Hur; Timothy Kehoe
  14. Employer Size and Spinout Dynamics By Faisal Sohail
  15. Connecting to Power: Political Connections, Innovation, and Firm Dynamics By Salome Baslandze
  16. Efficient Bubbles? By Valentin Haddad; Erik Loualiche; Paul Ho
  17. The Great Recession and a Missing Generation of Exporters By William Lincoln; Andrew McCallum; Michael Siemer
  18. Reaching through the fog: Institutional environment and cross-border giving of corporate foundations By Abigail S. Hornstein; Minyuan Zhao

  1. By: Joonkyu Choi (University of Maryland)
    Abstract: Despite the importance of high-growth young firms for economic growth, determinants of their growth and survival dynamics are not well understood. In this study, I develop a dynamic occupational choice model that identifies a key predictor of the early growth trajectory of young firms: the outside options of the business founders. I show that entrepreneurs with higher outside options as paid workers tend to take larger business risks, and thus exhibit a more up-or-out type of firm dynamics. I find empirical support for the model's predictions using a large founder-firm matched data set built from administrative databases of the U.S. Census Bureau. I find that controlling for past business performance, young firms operated by entrepreneurs with higher outside options exhibit (i) higher firm exit rates, (ii) more growth dispersion, and (iii) faster growth conditioning on survival. With the calibrated model, I find that deterioration in the outside options of entrepreneurs can have a sizable negative impact on aggregate output and productivity via lower risk-taking by young firms and slower growth in their life cycle. These findings indicate that the expected post-failure outcomes of entrepreneurs are an important factor that governs young firm growth as well as aggregate output and productivity.
    Date: 2018
  2. By: Diyue Guo (University of Maryland -College Park)
    Abstract: Multiproduct firms account for a large fraction of economic activity and are actively engaged in changing their product mix. In this paper, I investigate changes in product scope, the number of products that a firm offers, over the business cycle and decompose the impact of such changes on aggregate output. I use the Nielsen Retail Scanner data of U.S. consumer goods purchases for 2007-2014. I find that firm product scope is an important margin of adjustment. The changes at the new margin are procyclical on average and heterogeneous across firms. Such product scope changes affect aggregate consumption and output by changing the total number of products available in the market and by affecting firms' markups. This decomposition is shown in a model featuring heterogeneous multiproduct firms, oligopolistic competition and free firm entry. Firm and aggregate outcomes vary in different states of economic activity. In a recession state, lower average product scope implies a lower number of product varieties, which disincentivizes consumption. Additionally, since the most productive firms have higher market shares, as the data suggests, they charge higher markups as oligopolistic competitors. The implied average markup goes up and further decreases consumption.
    Date: 2018
  3. By: Brown, J. David (U.S. Census Bureau); Earle, John S. (George Mason University); Kim, Mee Jung (George Mason University); Lee, Kyung Min (George Mason University)
    Abstract: Analyzing data on all U.S. employers in a cohort of entering firms, we document a highly skewed size distribution, such that the largest 5% account for over half of cohort employment at firm birth and more than two-thirds at firm age 7. Little of the size variation is accounted for by industry or amount of finance, but relative size is strongly persistent over time: at age 7, the probability of 20+ employees is about 40 times larger for those entering with 20+ than for those entering with one. We link administrative and survey data to study the role of founder characteristics in high growth, defined as the largest 5% of the cohort at ages 0 and 7. Female-founded firms are 50% less likely to be in this ventile at both ages, and 34% less likely when controlling for detailed demographic and human capital variables. A similar initial gap for African-Americans, however, disappears by age 7. Founder age is positively associated with high growth at entry, but the profile flattens and turns negative as the firm ages. The education profile is initially concave, with graduate degree recipients no more likely than high school graduates to found high growth firms, but the former nearly catch up to those with bachelor's degrees by firm age 7, while the latter do not. Most other relationships of high growth with founder characteristics are highly persistent over time. Prior business ownership is strongly positively associated, and veteran experience negatively associated, with high growth. A larger founding team raises the probability of high growth, while, controlling for team size, diversity (by gender, age, race/ethnicity, or nativity) either lowers the probability or has little effect. Controlling for start-up capital raises the high-growth probability of firms founded by women, minorities, immigrants, veterans, smaller founding teams, and novice, younger, and less educated entrepreneurs. Perhaps surprisingly, female, minority, and less-educated entrepreneurs tend to choose high-growth industries, but fewer of them achieve high growth relative to their industry peers.
    Keywords: entrepreneurship, business entry, firm growth, firm dynamics, founder, employment, firm size distribution, firm performance
    JEL: D22 J24 L25 L26
    Date: 2018–07
  4. By: Dong, Feng (Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China); Wang, Pengfei (Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong); Wen, Yi (Federal Reserve Bank of St. Louis)
    Abstract: As a form of investment, the importance of capital reallocation between firms has been increasing over time, with the purchase of used capital accounting for 25% to 40% of firms total investment nowadays. Cross- firm reallocation of used capital also exhibits intriguing business-cycle properties, such as (i) the illiquidity of used capital is countercyclical (or the quantity of used capital reallocation across rms is procyclical), (ii) the prices of used capital are procyclical and more so than those of new capital goods, and (iii) the dispersion of firms' TFP or MPK (or the bene t of capital reallocation) is countercyclical. We build a search-based neoclassical model to qualitatively and quantitatively explain these stylized facts. We show that search frictions in the capital market are essential for our empirical success but not sufficient---fi nancial frictions and endogenous movements in the distribution of rm-level TFP (or MPK) and interactions between used-capital investment and new investment are also required to simultaneously explain these stylized facts, especially that prices of used capital are more volatile than that of new investment and the dispersion of firm TFP is countercyclical.
    Keywords: Capital Reallocation; Capital Search; Fragmented Markets; Endogenous Dispersion of rmsTFP; Endogenous Total Factor Productivity; Business Cycles
    JEL: E22 E32 E44 G11
    Date: 2018–08–01
  5. By: Mawdsley, John Kenneth; Chauradia, Amit; Brymer, Rhett
    Abstract: Extant research suggests that hiring experts during economic downturns can improve firm financial performance. However, recessionary labor markets deepen the challenges facing hiring firms, calling to question both the firm-level benefits and the tactics of acquiring talent when demand for a firm’s business is declining. We theorize and find that hiring expert talent during a recession actually weakens firm performance in the context of knowledge-based services. Notably though, we find firms can effectively attenuate the negative hiring effect by targeting particular labor pools, underlining the significance of gaining human capital advantages through focused sourcing. We test our hypotheses using a longitudinal sample of large U.S. corporate law firms between 2002 and 2010.
    Keywords: human capital; firm performance; knowledge workers; labor pools; economic recession
    JEL: L10
    Date: 2017–04–27
  6. By: In Hwan Jo (National University of Singapore); Tatsuro Senga (Queen Mary University of London)
    Abstract: Government policies that attempt to alleviate credit constraints faced by small and young firms are widely adopted across countries. We study the aggregate impact of such targeted credit subsidies in a heterogeneous firm model with collateral constraints and endogenous entry and exit. A defining feature of our model is a non-Gaussian process of firm-level productivity, which allows us to capture the skewed firm size distribution seen in the Business Dynamics Statistics (BDS). We compare the welfare and aggregate productivity implications of our non-Gaussian process to those of a standard AR(1) process. While credit subsidies resolve misallocation of resources and enhance aggregate productivity, increased factor prices, in equilibrium, reduce the number of firms in production, which in turn depresses aggregate productivity. We show that the latter indirect general equilibrium effects dominate the former direct productivity gains in a model with the standard AR(1) process, as compared to our non-Gaussian process, under which both welfare and aggregate productivity increase by subsidy policies. ​
    Date: 2018
  7. By: Loren Brandt (University of Toronto); Gueorgui Kambourov (University of Toronto); Kjetil Storesletten (University of Oslo)
    Abstract: The non-state manufacturing sector has been the engine of China's economic transformation. Up through the mid-1990s, the sector exhibited large regional differences; subsequently we observe rapid convergence in terms of new firm start-up rates, productivity, and wages. To analyze the drivers of this behavior, we construct a Melitz (2003) model that incorporates location-specific capital wedges, output wedges, and a novel entry barrier. Using Chinese Industry Census data for 1995, 2004, and 2008, we estimate these wedges and examine their role in explaining differences in performance across prefectures and over time. Entry barriers turn out to be the salient friction for explaining performance differences. We investigate the empirical covariates of these entry barriers and find that barriers are causally related to the size of the state sector. Thus, the downsizing of the state sector after 1997 may be important in explaining the rapid manufacturing growth over the 1995-2008 period.
    Date: 2018
  8. By: Duanmu, Jing-Lin; Bu, Maoliang; Pittman, Russell
    Abstract: Departing from the extant literature which assumes that firms pursue strong environmental performance as a differentiation strategy, we analyse the general relationship between firms’ competitive strategy and their response to heightened market competition. We find that, using a large sample of Chinese manufacturing firms between 2000 and 2005, intensified market competition has an overall negative impact on firms’ environmental performance. The negative impact is exacerbated in firms adopting a cost-leadership strategy, but attenuated in those adopting a differentiation strategy. The results emphasize the importance of including an examination of the particular competitive strategies chosen by firms in seeking to understand the impact of intensified market competition.
    Keywords: Market competition, environmental performance, China, corporate social responsibility, cost leadership, differentiation, market concentration
    JEL: L11 L13 L21 L25 M14 M31 Q52 Q56
    Date: 2018–04–18
    Abstract: To what extent do multinational firms consider past experience of exporting and future expectations of intra-firm trade when they engage in outward foreign direct investment (FDI) activities? How do trade costs affect these decisions? Recent literature has shown that FDI entry decisions depend on past export experience in a potential destination. In addition, due to the growth of global value chains, intra-firm trade in both directions (from parent company to affiliate, and from affiliate to parent company) has been shown to have an important effect on affiliate sales' patterns. In this paper, we examine how both mechanisms shape Japanese multinational enterprises' (MNEs) outward FDI activity. We use firm-level data from two basic surveys of Japanese companies: the Basic Survey of Japanese Business Structure and Activities and the Basic Survey on Overseas Business Activities for the period 1995-2015, and we look for evidence that FDI entry decision into a country is a function of past export experience and future expectations of intra-firm trade. We also consider firms' attributes, market attractiveness, barriers to entry, and other factors that can impact FDI entry decision. The results of our analysis have important implications for economic policy since they can shed light on alternative ways to promote inward and outward FDI activity by Japanese firms.
    Date: 2018–08
  10. By: Amodio, Francesco (McGill University); Choi, Jieun (World Bank); De Giorgi, Giacomo (University of Geneva); Rahman, Aminur (World Bank)
    Abstract: Firms in developing countries often avoid paying taxes by making informal payments to tax officials. These bribes may raise the cost of operating a business, and the price charged to consumers. To decrease these costs, we designed a feedback incentive scheme for business tax inspectors that rewards them according to the anonymous evaluation submitted by inspected firms. We show theoretically that feedback incentives decrease the equilibrium bribe amount, but make firms with more inelastic demand more attractive for inspectors. A tilted scheme that attaches higher weights to the evaluation of smaller firms limits the scope for targeting and decreases the bribe amount to a lesser extent. We evaluate both schemes in a field experiment in the Kyrgyz Republic and find evidence that is consistent with the model predictions. By decreasing bribes, our intervention reduces the average cost for firms and the price they charge to consumers. Since fewer firms substitute bribes for taxes, tax revenues increase. Our study highlights the role of firm heterogeneity and market structure in shaping the relationship between firms and tax inspectors, and provides clear evidence of pass-through of bribes to consumers.
    Keywords: business tax, incentives, market structure, demand elasticity
    JEL: D22 D40 H26 H71 O12
    Date: 2018–07
  11. By: Juliane Begenau (Stanford University); Laura Veldkamp (New York University); Maryam Farboodi (Princeton University)
    Abstract: One of the most important trends in modern macroeconomics is the shift from small firms to large firms. At the same time, financial markets have been transformed by advances in information technology. We explore the hypothesis that the use of big data in financial markets has lowered the cost of capital for large firms, relative to small ones, enabling large firms to grow larger. As faster processors crunch ever more data -- macro announcements, earnings statements, competitors' performance metrics, export demand, etc. -- large firms become more valuable targets for this data analysis. Large firms, with more economic activity and a longer firm history offer more data to process. Once processed, that data can better forecast firm value, reduce the risk of equity investment, and thus reduce the firm's cost of capital. As big data technology improves, large firms attract a more than proportional share of the data processing, enabling large firms to invest cheaply and grow larger.
    Date: 2018
  12. By: De Sousa, José; Disdier, Anne-Célia; Gaigné, Carl
    Abstract: Using firm and industry data, we unveil two empirical regularities: (i) Demand uncertainty not only reduces export probabilities but also decreases export quantities and increases export prices; (ii) The most productive exporters are more affected by higher industry-wide expenditure volatility than are the least productive exporters. We rationalize these regularities by developing a new firm-based trade model wherein managers are risk averse. Higher volatility induces the reallocation of export shares from the most to the least productive incumbents. Greater skewness of the demand distribution and/or higher trade costs weaken this effect. Our results hold for a large class of consumer utility functions.
    Keywords: International Relations/Trade
    Date: 2017–12–11
  13. By: Jose Asturias (Georgetown University in Qatar); Kim Ruhl (Pennsylvania State University); Sewon Hur (University of Pittsburgh); Timothy Kehoe (University of Minnesota)
    Abstract: Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that a larger fraction of aggregate productivity growth is due to entry and exit during periods of fast GDP growth. Studies of other countries confirm this empirical relationship. To analyze this relationship, we develop a simple model of firm entry and exit based on Hopenhayn (1992) in which there are analytical expressions for the FHK decomposition. When we introduce reforms that reduce entry costs or reduce barriers to technology adoption into a calibrated model, we find that the entry and exit terms in the FHK decomposition become more important as GDP grows rapidly, just as in the data from Chile and Korea.
    Date: 2018
  14. By: Faisal Sohail (Washington University in St. Louis)
    Abstract: Most new firms are founded by former employees of existing firms - spinouts. This paper studies the relationship between employer size and spinout entry, size, and growth. Using data from Mexico, we document that employees from small firms are more likely to form spinouts than those from large firms. Second, spinouts from large employers start at a larger scale and grow faster than spinouts from small employers. Although a qualitatively similar relationship is observed in data from the U.S., there are large quantitative differences in the levels of spinout formation. To understand the impact of these differences on aggregate outcomes, we build a model of occupational choice and firm dynamics in which workers can learn from and adopt the productivity of their employers to form their own firms. In this framework, differences in the rates of spinout formation between Mexico and the U.S. are driven by differences in the efficiency with which employees learn from their employers. We interpret this efficiency as representing a form of managerial quality. The model, calibrated to match spinout entry rates across the two countries, can account for 13 and 19% of the cross-country variation in output per worker and firm growth respectively. These findings highlight the relevance of spinouts for aggregate outcomes, and the potential for managerial quality to not only impact incumbent firms but also future entrants.
    Date: 2018
  15. By: Salome Baslandze (EIEF - Einaudi Institute for Economics a)
    Abstract: We study the Italian firms and their workers to answer this question. Our analysis uses a brand-new data spanning the period from 1993 to 2014 where we merge: (i) firm-level balance sheet data, (ii) the social security data on the universe of workers, (iii) patent data from the European Patent Office, (iv) registry of local politicians, and (v) detailed data on local elections in Italy. We find that firm-level political connections are widespread, especially among large firms, and that industries with a larger share of politically connected firms feature worse firm dynamics. Market leaders are much more likely to be politically connected and less likely to innovate, compared to their competitors. In addition, connections relate to higher survival and growth in employment and revenue but not in productivity – the result that we also confirm using regression discontinuity design. We build a firm dynamics model where we allow firms to invest in innovation and/or political connection to advance their productivity and to overcome certain market frictions. The model highlights the new interaction between static gains and dynamic losses from rent-seeking for aggregate productivity.
    Date: 2018
  16. By: Valentin Haddad (University of California, Los Angeles); Erik Loualiche (University of Minnesota); Paul Ho (Princeton University)
    Abstract: Episodes of booming firm creation often coincide with intense speculation on financial markets. We show that while speculation leads to more firm entry, it might actually mitigate over-entry, leading to efficient innovative booms. More broadly, disagreement among investors completely transforms the economics of optimal firm creation. We characterize the interaction between speculation and classic entry externalities from growth theory through a general entry wedge formula for a non-paternalistic planner. The business-stealing effect is mitigated when investors believe they can identify the best firms; hence more entry goes along with less excess entry. The appropriability effect also vanishes, leaving only general equilibrium effects on input prices, aggregate demand, or knowledge. As a result, speculation reverses the role of many industry characteristics such as the labor share for efficiency. Further, economies with identical aggregate properties but a different market structure have the same efficiency with agreement, but differ in presence of bubbles.
    Date: 2018
  17. By: William Lincoln (Claremont McKenna College); Andrew McCallum (Federal Reserve Board); Michael Siemer (Federal Reserve System Board of Governor)
    Abstract: The collapse of international trade surrounding the Great Recession has garnered significant attention. This paper studies firm entry and exit in foreign markets and their role in the post-recession recovery of U.S. exports using confidential microdata from the U.S. Census Bureau. We find that incumbent exporters account for the vast majority of the decline in export volumes during the crisis. The recession also induced a missing generation of exporters, with large increases in exits and a substantial decline in entries into foreign markets. New exporters during these years tended to have larger export volumes, however, compensating for the decline in the number of exporting firms. Thus, while entry and exit were important for determining the variety of U.S. goods that were exported, they were less important for the trajectory of aggregate foreign sales.
    Date: 2018
  18. By: Abigail S. Hornstein (Department of Economics, Wesleyan University); Minyuan Zhao (Management Department, The Wharton School, University of Pennsylvania)
    Abstract: Research Summary: Corporate philanthropy has long been recognized as an important part of multinational strategy, yet we know relatively little how charitable giving is allocated across countries. Using a sample of 208 U.S.-based corporate foundations from 1993 to 2008, we find that the foundations give more in countries with opaque institutional environments, but they do so through international intermediaries. They also give more when the funding firms have new entries in countries with weak institutions—hence greater needs for the social license to operate—or when their operations require stronger connections with local suppliers or customers. These findings point to the use of corporate philanthropy as part of corporate diplomacy when the local institutions are ineffective and the importance of reaching out to local constituents is high. Managerial Summary: Corporate foundations play an important role in firms' charitable giving across countries. This article analyzes how foundation giving is associated with the funding firm's need to navigate the local business environments. Using a sample of 208 U.S.-based corporate foundations from 1993 to 2008, we find that foundations give more in countries characterized by weak rule of law and high levels of corruption, and when the funding firms have newly established subsidiaries or stronger need to connect with local stakeholders there. However, donations to countries with weak institutions are more likely to go through international intermediaries to avoid potential liabilities. The results are consistent with the view that corporate foundations support corporate diplomacy and help obtain the social license to operate in the host countries.
    Keywords: corporate foundations, corporate philanthropy, institutional environment, multinational enterprises, multinational strategies
    Date: 2018–08

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