nep-bec New Economics Papers
on Business Economics
Issue of 2021‒08‒09
eleven papers chosen by
Vasileios Bougioukos
Bangor University

  1. CSR, audit quality and firm performance during COVID-19: an organizational legitimacy perspective By Yadav, Sandeep; Srivastava, Jagriti
  2. Heavy Tailed, but not Zipf: Firm and Establishment Size in the U.S. By Illenin O. Kondo; Logan T. Lewis; Andrea Stella
  3. Deflation and Declining Business Dynamism in a Cash-in-Advance Economy By FURUKAWA Yuichi; NIWA Sumiko
  4. Misallocation and inequality By Nezih Guner; Alessandro Ruggieri
  5. Interlocking margins: A framework on the interaction of offshoring and outsourcing decisions By Edwin Jiang
  6. The return on human (STEM) capital in Belgium By Gert Bijnens; Emmanuel Dhyne
  7. Unraveling industry, firm and host-region effects on export behaviors of international new ventures and established exporters By Ine Paeleman; Shaker A. Zahra; Jonas W. B. Lang
  8. Our product is unique: A note on a delegation game with differentiated products By Clemens Buchen; Sven A. Hartmann; Alberto Palermo
  9. "Mixed oligopoly and predatory public firms". By Joan-Ramon Borrell; Carlos Suarez
  10. Trade and Innovation By Marc J Melitz; Stephen J Redding
  11. Local governance quality and law compliance: The case of Mozambican firms By Hanna Berkel; Christian Estmann; John Rand

  1. By: Yadav, Sandeep; Srivastava, Jagriti
    Abstract: Purpose - COVID-19 induced uncertainty in the firms’ business transactions, product-market competition and financial market cause severe organizational legitimacy crisis. Using the organizational legitimacy perspective, we study the relationship between corporate social responsibility (CSR) activities, audit quality, and firm performance. Design/methodology/approach – We use a quarterly panel of 89,185 firm observations (15,955 unique firms) from 131 countries from July 2018 to December 2020 for 10 quarters. We use a Difference-in-Difference (DiD) method to estimate the effect of CSR activities and audit quality on firm performance during the COVID-19 period. Findings - We find a U-shaped relationship between CSR and firm performance. This relationship is strengthened during COVID-19. In contrast, we find an inverted U-shaped relationship between firm audit quality (audit fee) and firm performance. However, this relationship is weakened during the pandemic. Originality/value – Our study makes important contributions to theory and practice on maintaining organizational legitimacy during the pandemic. During the crisis, managers need to focus on strategies increasing firm value for the time period. This study shows that firms’ temporal legitimacy gaining practices such as CSR activities and audit quality provides an opportunity to increase firm value. Firm managers also need to identify the optimal level of CSR activities and audit fees to balance the cost of agency and the benefits of legitimacy.
    Keywords: CSR, audit quality, COVID-19, firm performance, organizational legitimacy
    JEL: M14 M42
    Date: 2021–06
  2. By: Illenin O. Kondo; Logan T. Lewis; Andrea Stella
    Abstract: Heavy tails play an important role in modern macroeconomics and international economics. Previous work often assumes a Pareto distribution for firm size, typically with a shape parameter approaching Zipf’s law. This convenient approximation has dramatic consequences for the importance of large firms in the economy. But we show that a lognormal distribution, or better yet, a convolution of a lognormal and a non-Zipf Pareto distribution, provides a better description of the U.S. economy, using confidential Census Bureau data. These findings hold even far in the upper tail and suggest heterogeneous firm models should more systematically explore deviations from Zipf’s law.
    Keywords: Firm size distribution, TFP distribution, Lognormal, Pareto, Zipf’s law, Granularity
    JEL: L11 E24
    Date: 2021–07
  3. By: FURUKAWA Yuichi; NIWA Sumiko
    Abstract: This study considers the relationship between deflation and declining business dynamism. We do this by incorporating the empirical evidence that inflationary factors essentially affect all stages of an R&D firm's life cycle―entry, exit, and survival―into an R&D-based growth model. Our model has a new feature; namely, the entry, exit, and survival of R&D firms are all endogenous and subject to a cash-in-advance constraint. The core finding is that deflation can significantly affect the nature of business dynamism. Specifically, a decrease in the inflation rate potentially encourages or discourages innovation and survival investments; however, it necessarily discourages both if the entry cost is sufficiently high. In this case, deflation stifles business dynamism, leading to lower entry and exit rates and a maturity bias in the firm age distribution. Calibrating the model to the U.S. economy, we show that deflation causes declining business dynamism under realistic values of entry, exit, and growth rates. Then, we show that deflation also causes welfare loss if the natural rate of firm exit is higher.
    Date: 2021–07
  4. By: Nezih Guner; Alessandro Ruggieri
    Abstract: For a large set of countries with different GDP per capita levels, we document how the distribution of labour earnings varies by development. Data reveals that the distribution of earnings changes with development in a particular way: while there is a larger mass at the left-tail, the right-tails shrinks, and moves towards the center. As a result, while the standard deviation of log earnings increases with development, the mean-to-median ratio declines. We interpret this fact within a model economy with heterogeneous workers and firms, which features industry dynamics, labor market frictions captured by a matching function, skill accumulation of workers with learning-by-doing and on-the-job training, and earnings inequality both across firms and workers. The benchmark economy is calibrated to the UK. We study how the earnings distribution changes as we increase two distortions in the benchmark economy: wedges on firms' output correlated with firm productivity and reductions in the labor market's ability to match unemployed workers and open vacancies. These distortions lead to the misallocation of resources and reduce employment and the GDP per capita. But they also affect how much firms are willing to pay to workers, how well higher skilled workers are matched with firms with higher productivity, and how much training workers receive. The model is consistent with a host of factors on how firm size distribution, firms' training decisions, and workers' life-cycle earnings profiles change with development and generates the observed patterns of changes in earnings distribution with development.
    Keywords: labor market frictions, correlated distortions, productivity, establishment size, human capital accumulation, job training, life-cycle wage profile, inequality, development
    Date: 2021
  5. By: Edwin Jiang
    Abstract: I develop a multi-country general equilibrium model on global sourcing which considers individual firm’s decisions on outsourcing as well as offshoring. These decisions are closely connected as more extensive offshoring provides incentives for further integration of inputs. The firm-level decisions aggregate to produce gravity style equations of trade flows between countries, and intra-firm transactions.
    Keywords: international trade, offshoring, outsourcing
    Date: 2021–07
  6. By: Gert Bijnens (Economics and Research Department, NBB); Emmanuel Dhyne (Economics and Research Department, NBB)
    Abstract: Whilst overall productivity growth is stalling, firms at the frontier are still able to capture the benefits of the newest technologies and business practices. This paper uses linked employer-employee data covering all Belgian firms over a period of almost 20 years and investigates the differences in human capital between highly productive firms and less productive firms. We find a clear positive correlation between the share of high-skilled and STEM workers in a firm's workforce and its productivity. We obtain elasticities of 0.20 to 0.70 for a firm's productivity as a function of the share of high-skilled workers. For STEM (science, technology, engineering, mathematics) workers, of all skill levels, we find elasticities of 0.20 to 0.45. More importantly, the elasticity of STEM workers is increasing over time, whereas the elasticity of high-skilled workers is decreasing. This is possibly linked with the increasing number of tertiary education graduates and at the same time increased difficulties in filling STEM-related vacancies. Specifically, for high-skilled STEM workers in the manufacturing sector, the productivity gain can be as much as 4 times higher than the gain from hiring additional high-skilled non-STEM workers. To ensure that government efforts to increase the adoption of the latest technologies and business practices within firms lead to sustainable productivity gains, such actions should be accompanied by measures to increase the supply and mobility of human (STEM) capital. Without a proper supply of skills, firms will not be able to reap the full benefits of the digital revolution.
    Keywords: : human capital, skills, education, productivity, linked employer-employee data
    JEL: E24 I26 J24
    Date: 2021–07
  7. By: Ine Paeleman (University of Antwerp, Antwerp, Belgium); Shaker A. Zahra (Carlson School of Management, University of Minnesota, Minneapolis, Minnesota, U.S.A.); Jonas W. B. Lang (Ghent University, Ghent, Belgium, 4 Business School, University of Exeter, UK)
    Abstract: While an extensive strategy literature seeks to explain differences in firm performance, little is known about how much firm, industry and host-regions matter in explaining heterogeneity in export behaviors. The international entrepreneurship literature has highlighted that firm-, industry- and hostregion-level factors shape export behaviors, yet more research is needed about their relative contribution. We decompose the variance of export behaviors of 4,982 Belgian SMEs during 2006‒2014. Results indicate that firm effects account for the largest part in the variation of export behaviors, followed by industry and host-region effects. However, host-region effects matter more for INVs whereas firm effects matter more for established exporters. There are no substantial differences in industry effects among either sample of firms. Our study contributes to the literatures on variance decomposition and international entrepreneurship.
    Keywords: : new ventures; host-region effects; firm effects; export; variance decomposition
    Date: 2021–07
  8. By: Clemens Buchen (WHU – Otto Beisheim School of Management); Sven A. Hartmann (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University); Alberto Palermo (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University)
    Abstract: We analyze a Cournot duopoly market with differentiated goods and the separation between ownership and control. We consider a delegation game, for which the owner of a firm hires a manager who acts as if the good has a lower degree of substitutability than it really has. This is so either because managers are biased and perceive the good in this way, or because firms design an incentive scheme accordingly, which leads the manager to act in this way. Both firms rely on delegation. We discuss conditions, which lead one firm to increase its profit implying that the usual result of a prisoners’ dilemma is avoided.
    Keywords: Strategic Delegation, Managerial Incentives, Oligopoly
    JEL: D21 D62 L13
    Date: 2021–02
  9. By: Joan-Ramon Borrell (Universitat de Barcelona.); Carlos Suarez (Universidad Jorge Tadeo Lozano, Universitat Barcelona.)
    Abstract: In this paper, we propose a mixed duopoly model in which the public company aims to maximize a weighted function of profits and a function of its production scale. We found that if the weight to the scale of production is high the public firms may exclude its rivals from the market (exercising predatory prices). We also find that the profit sacrifice by the public firm to get this exclusion is higher if there are marked differences between the cost efficiency of private and public firms.
    Keywords: Mixed Oligopoly, Predatory prices, Public firm. JEL classification: L13, L94, C10.
    Date: 2021–07
  10. By: Marc J Melitz (Harvard University); Stephen J Redding (Princeton University, CEPR, NBER)
    Abstract: Two central insights from the Schumpeterian approach to innovation and growth are that the pace of innovation is endogenously determined by the expectation of future profits and that growth is inherently a process of creative destruction. As international trade is a key determinant of firm profitability and survival, it is natural to expect it to play a key role in shaping both incentives to innovate and the rate of creative destruction. In this paper, we review the theoretical and empirical literature on trade and innovation. We highlight four key mechanisms through which international trade affects endogenous innovation and growth: (i) market size; (ii) competition; (iii) comparative advantage; (iv) knowledge spillovers. Each of these mechanisms offers a potential source of dynamic welfare gains in addition to the static welfare gains from trade from conventional trade theory. Recent research has suggested that these dynamic welfare gains from trade can be substantial relative to their static counterparts.Discriminating between alternative mechanisms for these dynamic welfare gains and strengthening the evidence on their quantitative magnitude remain exciting areas of ongoing research.
    JEL: F13 O31
    Date: 2020–06
  11. By: Hanna Berkel; Christian Estmann; John Rand
    Abstract: Using panel data of manufacturing enterprises in Mozambique between 2012 and 2017, we investigate how changes in perceived quality of governance are related to firms' law compliance. Controlling for firm-level unobserved heterogeneity, we look at three aspects of governance and their components: transparency, security, and infrastructure. We examine which of these have the potential to alter firm compliance behaviour. We find that enterprises' perceptions of transparency are key to law abidance.
    Keywords: Governance, Transparency, Law, Firms, Firm behaviour
    Date: 2021

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