nep-tid New Economics Papers
on Technology and Industrial Dynamics
Issue of 2007‒04‒21
four papers chosen by
Rui Baptista
Technical University of Lisbon

  1. Product Creation and Destruction: Evidence and Price Implications By Christian Broda; David E. Weinstein
  2. Defending Gibrat’s Law as a Long-Run Regularity By Francesca Lotti; Enrico Santarelli; Marco Vivarelli
  4. Local Firms in Latecomer Developing Countries amidst China's Rise -The case of Vietnam's motorcycle industry- By Fujita, Mai

  1. By: Christian Broda; David E. Weinstein
    Abstract: This paper describes the extent and cyclicality of product creation and destruction in a large sector of the U.S. economy and quantifies its implications for the measurement of consumer prices. We find four times more entry and exit in product markets than is typically found in labor markets because most product turnover happens within the boundaries of the firm. Net product creation is strongly pro-cyclical, but contrary to the behavior of labor flows, it is primarily driven by creation rather than destruction. High rates of innovation are also accompanied by substantial price volatility of products. These facts suggest that the CPI deviates from a true cost-of-living index in three important dimensions. The quality bias that arises as new goods replace outdated ones causes the CPI to overstate inflation by 0.8 percent per year; the cyclicality of the bias implies that business cycles are more volatile than indicated by official statistics; and finally, sampling error is sufficiently large that over the last 10 years policymakers could not statistically distinguish whether quarterly inflation was accelerating or decelerating 65 percent of the time.
    JEL: E21 E31 E32
    Date: 2007–04
  2. By: Francesca Lotti (Bank of Italy); Enrico Santarelli (University of Bologna, Max Planck Institute of Economics Jena and ENCORE Amsterdam); Marco Vivarelli (Università Cattolica del Sacro Cuore, CSGR Warwick, Max Planck Institute of Economics Jena and IZA)
    Abstract: According to Gibrat’s Law of Proportionate Effect, the growth rate of a given firm is independent of its size at the beginning of the period examined. While earlier studies tended to confirm the Law, more recent research generally rejects it. This paper reconciles these two streams of literature, taking into account the role of market selection and learning in reshaping a given population of firms through time. Consistently with previous studies, we found that Gibrat’s Law has to be rejected ex ante, since smaller firms tend to grow faster than their larger counterparts. However, a significant convergence towards Gibrat-like behavior can be detected ex post. This finding is an indication that market selection "cleans" the original population of firms, so that the resulting industrial "core" does not depart from a Gibrat-like pattern of growth. From a theoretical point of view, this result is consistent with those models based on passive and active learning, and can be seen as a defense of the validity of the Law in the long-run.
    Keywords: Gibrat’s Law, firm size, firm age, firm survival, firm growth
    JEL: L11 L26
    Date: 2007–04
  3. By: Katja Zajc Kejžar
    Abstract: This paper examines the role of inward foreign direct investment (FDI) in firm selection processes in the Slovenian manufacturing sector in the 1994-2003 period by assessing the impact of the entry and presence of foreign firms on a domestic firm’s probability of exiting. The results confirm that not only do foreign entrants tend to be above-average productive but they also find it easier to exit (particularly those entering in the form of acquisitions). Further, the least efficient firms are found to experience a drop in their survival probability upon a foreign firm’s entry. In addition, a foreign firm’s entry seems to stimulate the selection process not only within the industry but also through backward linkages in the upstream supplying industries. Regarding the productivity spillover effects from foreign to local firms the results suggest that they mostly operate through vertical linkages rather than within the same industry.
    Keywords: foreign direct investment, firm selection process, crowding out, productivity spillovers, Slovenia
    JEL: F23 L11 L25 C23
    Date: 2006–09–01
  4. By: Fujita, Mai
    Abstract: This paper examines the impact of China’s recent rise on the development of local firms in latecomer developing countries. Based on a detailed analysis of Vietnam’s motorcycle industry, the paper argues that China’s impact may go beyond what a trade analysis suggests. Indeed, China’s rise induced a dynamic transformation in the structure of value chains within Vietnam’s motorcycle industry, bringing about far-reaching consequences on the development and upgrading trajectories of local firms. The implications of the case study for the wider “global value chain†approach is also discussed.
    Keywords: Global value chain, Motorcycle industry, Vietnam, China, Upgrading, Motorcycles
    JEL: F23 L22 L62
    Date: 2007–03

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