nep-bec New Economics Papers
on Business Economics
Issue of 2020‒04‒27
nine papers chosen by
Vasileios Bougioukos
Bangor University

  1. Patents to Products: Product Innovation and Firm Dynamics By David Argente; Salomé Baslandze; Douglas Hanley; Sara Moreira
  2. Worker and Firm Responses to Trade Shocks: The UK-China Case By De Lyon, Josh; Pessoa, Joao Paulo
  3. New York Fed Surveys: Business Activity in the Region Sees Historic Plunge in April By Jaison R. Abel; Jason Bram; Richard Deitz
  4. Firm-level Exposure to Epidemic Diseases: Covid-19, SARS, and H1N1 By Tarek Alexander Hassan; Stephan Hollander; Laurence van Lent; Ahmed Tahoun
  5. Profit-enhancing entries in mixed oligopolies By Haraguchi, Junichi; Matsumura, Toshihiro
  6. The Micro and Macro of Managerial Beliefs By Barrero, Jose Maria
  7. Connecting to Power: Political Connections, Innovation, and Firm Dynamics By Ufuk Akcigit; Salomé Baslandze; Francesca Lotti
  8. Learning in foreign and domestic value chains – The role of opportunities and capabilities By Rene Belderbos; Christoph Grimpe
  9. Price-cost margins and fixed costs By Filip Abraham; Yannick Bormans; Jozef Konings; Werner Roeger

  1. By: David Argente; Salomé Baslandze; Douglas Hanley; Sara Moreira
    Abstract: We study the relationship between patents and actual product innovation in the market, and how this relationship varies with firms’ market share. We use textual analysis to create a new data set that links patents to products of firms in the consumer goods sector. We find that patent filings are positively associated with subsequent product innovation by firms, but at least half of product innovation and growth comes from firms that never patent. We also find that market leaders use patents differently from followers. Market leaders have lower product innovation rates, though they rely on patents more. Patents of market leaders relate to higher future sales above and beyond their effect on product innovation, and these patents are associated with declining product introduction on the part of competitors, which is consistent with the notion that market leaders use their patents to limit competition. We then use a model to analyze the firms' patenting and product innovation decisions. We show that the private value of a patent is particularly high for large firms as patents protect large market shares of existing products.
    Keywords: patent value; productivity; creative destruction; patents; product innovation; growth
    JEL: O3 O4
    Date: 2020–04–17
  2. By: De Lyon, Josh; Pessoa, Joao Paulo
    Abstract: We exploit the recent surge in Chinese export growth to study the effects of a trade shock on a foreign market - the UK. We find that individuals initially employed in sectors highly exposed to Chinese imports earned less and remained out of employment longer than workers in sectors that were less exposed to import competition in the period 2000-2007. Earnings losses were most severe when workers remained in the same industry, whereas those who switched out of their 2-digit sector were able to mitigate these losses. The effects are heterogeneous across the distribution of earnings within the same age cohort, with initially better-paid workers suffering less in terms of employment and earnings than those initially worse-paid. Female workers experienced a greater fall in total earnings, mostly through reduced years of employment. Furthermore, firms in industries flooded by Chinese products displayed lower employment growth and higher probability of going out of business than firms in sectors more insulated from competition with China.
    Date: 2020–04–14
  3. By: Jaison R. Abel; Jason Bram; Richard Deitz
    Abstract: Indicators of regional business activity plunged to historic lows in early April, as efforts to slow the spread of the coronavirus kept many people at home and shut down large parts of the regional economy, according to the Federal Reserve Bank of New York’s two business surveys. The headline index for both surveys plummeted to nearly -80, well below any historical precedent including the depths of the Great Recession. About 60 percent of service firms and more than half of manufacturers reported at least a partial shutdown of their operations thus far. Layoffs were widespread, with half of all businesses surveyed reporting lower employment levels in early April.
    Keywords: Business surveys; coronavirus; regional; COVID-19
    JEL: R10
    Date: 2020–04–16
  4. By: Tarek Alexander Hassan; Stephan Hollander; Laurence van Lent; Ahmed Tahoun
    Abstract: Using tools described in our earlier work (Hassan et al., 2019, 2020), we develop text- based measures of the costs, benefits, and risks listed firms in the US and over 80 other countries associate with the spread of Covid-19 and other epidemic diseases. We identify which firms expect to gain or lose from an epidemic disease and which are most affected by the associated uncertainty as a disease spreads in a region or around the world. As Covid-19 spreads globally in the first quarter of 2020, we find that firms' primary concerns relate to the collapse of demand, increased uncertainty, and disruption in supply chains. Other important concerns relate to capacity reductions, closures, and employee welfare. By contrast, financing concerns are mentioned relatively rarely. We also identify some firms that foresee opportunities in new or disrupted markets due to the spread of the disease. Finally, we find some evidence that firms that have experience with SARS or H1N1 have more positive expectations about their ability to deal with the coronavirus outbreak.
    JEL: E0 E6 F0 G12 I0
    Date: 2020–04
  5. By: Haraguchi, Junichi; Matsumura, Toshihiro
    Abstract: Mixed oligopolies are characterized by private and public enterprises. Entry into these markets was restrictive, but has now been relaxed by deregulations; as a result, private firms have entered mixed oligopolies. An increase in the number of private firms increases competition among private firms and reduces the profit of incumbent private firms, given the privatization policy remains unchanged. However, an increase in the number of private firms may in turn affect privatization policy, and thus, indirectly affect private firms' profits. Therefore, the overall effect on private firms' profit is ambiguous. In this study, we thus investigate how the number of private firms affects the profit of each private firm in mixed oligopolies. For this end, we use a linear-quadratic production cost function, which covers two popular model formulations in the mixed oligopoly literature. We show that, if the degree of privatization is exogenous, the profit of each private firm is decreasing in the number of private firms. However, if the degree of privatization is endogenous, the relationship between the number of private firms and profit takes an inverted-U shape under a plausible range of cost parameters. Our results imply that there can exist multiple equilibria in free-entry markets with different degrees of privatization.
    Keywords: optimal degree of privatization, profit-enhancing entry, multiple long-run stable equilibria
    JEL: D43 H44 L33
    Date: 2020–04–17
  6. By: Barrero, Jose Maria (Instituto Tecnologico Autonomo de Mexico)
    Abstract: This paper studies how biases in managerial beliefs affect managerial decisions, firm performance, and the macroeconomy. Using a new survey of US managers I establish three facts. (1) Managers are not over-optimistic: sales growth forecasts on average do not exceed realizations. (2) Managers are overprecise (overconfident): they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after positive shocks and too pessimistic after negative shocks. To quantify the implications of these facts, I estimate a dynamic general equilibrium model in which managers of heterogeneous firms use a subjective beliefs process to make forward-looking hiring decisions. Overprecision and overextrapolation lead managers to overreact to firm-level shocks and overspend on adjustment costs, destroying 2.1 percent of the typical firm’s value. Pervasive overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5 to 2.3 percent relative to the rational expectations equilibrium. These findings suggest overreaction may amplify asset-price and business cycle fluctuations.
    Date: 2020–04–09
  7. By: Ufuk Akcigit; Salomé Baslandze; Francesca Lotti
    Abstract: How do political connections affect firm dynamics, innovation, and creative destruction? To answer this question, 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. Our model generates a number of theoretical testable predictions and highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity. We test the predictions of our model using a brand-new dataset on Italian firms and their workers. Our dataset spans the period from 1993 to 2014, where we merge: (i) firm-level balance sheet data, (ii) social security data on the universe of workers, (iii) patent data from the European Patent Office, (iv) the national 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. We identify a leadership paradox: when compared to their competitors, market leaders are much more likely to be politically connected but much less likely to innovate. In addition, political connections relate to a higher rate of survival, as well as growth in employment and revenue, but not in productivity—a result that we also confirm using a regression discontinuity design.
    Keywords: political connections; productivity; innovation; firm dynamics; creative destruction
    JEL: O30 O43
    Date: 2020–04–17
  8. By: Rene Belderbos; Christoph Grimpe
    Abstract: We suggest that the benefits of learning in international value chains for firms’ innovation performance are heterogeneous and depend on the specific source of learning (customers, suppliers, or competitors), whether these sources are based in countries that are technologically advanced or less advanced (learning opportunities), on technology leadership (learning capabilities) on the part of the focal firm, and on the simultaneous learning that occurs from domestic firms. Using direct survey evidence on learning and innovation by German firms, we confirm that technology leaders benefit from advanced foreign customer and supplier learning, that technology laggards benefit from less advanced foreign customer learning and advanced foreign competitor learning, and that both leaders and laggards benefit from domestic customer learning. The findings suggest a tradeoff between the opportunities to learn from foreign or domestic customers.
    Keywords: learning from internationalization, innovation, technology leadership
    Date: 2020–04–16
  9. By: Filip Abraham; Yannick Bormans; Jozef Konings; Werner Roeger
    Abstract: This paper introduces a new method which allows to simultaneously estimate price-cost margins and fixed costs in production, using standard production data on expenditures of inputs and revenue at the firm level. In particular, we exploit properties of the primal and dual price based and cost based Solow residual, in which we allow not only for the flexible treatment of capital (either fixed, variable or a combination of both) but also for the flexible treatment of other input factors, such as labor and intermediate inputs. We use a 30 year long firm level panel of Belgian firms to estimate price-cost margins and fixed costs as a share of revenue to show the following key results: Ignoring fixed costs in production, as in most of the literature, underestimates price-cost margins and overestimates excess profit margins. We also find that fixed costs as well as price-cost margins decline in the last three decades, pushing excess profit margins downwards, suggesting highly competitive markets in Belgium.
    Keywords: Price-cost margins, fixed costs, excess profits, market power, firm level data
    JEL: D21 L13 L16
    Date: 2020–04

This nep-bec issue is ©2020 by Vasileios Bougioukos. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.