Entry and exit as a source of aggregate productivity growth in two alternative technological regimes

This paper proposes a neo-Schumpeterian model in order to discuss how the mechanisms of entry and exit contribute to industry productivity growth in alternative technological regimes. Our central hypothesis is that new firms generate gains in aggregate productivity by increasing both the productivity level and competition intensity. By assuming that firms learn about the relevant technology through a variety of sources, and by allowing a continuous flow of entry and exit into the market, our study shows that firm exit and output contraction take mostly place among less productive firms, while output expansion and entry are concentrated among the more efficient ones. The greater is the competitive pressure generated by new entrants, the higher is the expected productivity level of established firms. Overall, our analysis suggests that micro analysis is the proper complement to aggregate industry studies, as it provides a considerable insight into the causes of productivity growth.     

Trade and product market policies in upstream sectors and productivity in downstream sectors: Firm-level evidence from China

This paper explores the heterogeneous productivity impact of trade, product market and financial market policies over the last decade in China. The paper makes a critical distinction between downstream and upstream industries, focusing on the indirect effects of regulation in upstream industries on firm performance in downstream manufacturing industries. We identify the differential effect of these policies on firm productivity growth depending on how far incumbents are relative to the technological frontier. Trade and product market reforms are found to deliver stronger gains for firms that are closer to the industry-level technological frontier, while the reverse holds for financial market reforms. The key conclusion that can be derived from the empirical analysis is that further product, trade and financial market reforms would bring substantial gains in China and could therefore speed up the convergence process. Taken at face value, the empirical estimates would imply that aligning product, trade and financial market regulation to the average level observed in OECD countries would bring aggregate manufacturing productivity gains of respectively 9%, 3% and 6.5% after 5 years.     

Productivity Performance of Export Market Entry and Exit: Evidence from Indian Firms

This paper contributes to the literature on exporting and firm productivity, focusing on export entry (efficiency), learning (post‐entry growth) and exit (inefficiency) by Indian firms. Drawing on 7000 firms during 1989–2009, our main objective is to examine the effect of exporting on firm productivity, correcting for selection bias using propensity‐score matching, which allows a “like‐for‐like” comparison between new exporters and nonexporters. Robust to different matching estimators, we find evidence of learning‐by‐exporting that new exporters acquire rapid productivity growth after entry, relative to nonexporters. We also find that (1) exporters are more productive than nonexporters; (2) productive firms tend to self‐select in entering the exporting market, and (3) least productive exporters are found to exit the export market as they experience adverse productivity effect prior to the year of exit. Our robust result on learning‐by‐exporting suggests that entering export market does appear to be a channel explaining the Indian recent growth miracle.     

Exporting and Productivity: The Effects of Multi‐Product and Multi‐Market Export Entry

Empirical studies on the micro‐level effects of exporting on productivity pay usually little attention to the potentially heterogeneous effects of the different modes of export market entry. We show that multi‐product export entry is associated with higher post‐entry productivity compared to other firms. This can imply significant benefits from experimentation with different products. Our analysis is based on detailed export data from full population of firms in Estonia, disaggregated for each firm by export markets and individual products.     

Exporting, productivity and agglomeration

Economic analysis of adjustment to globalisation has shifted from countries and industries to firms and plants. One particularly fruitful area for research has been aspects of entry to, participation in and exit from export markets. This paper contributes to that literature. Its focus is the exporting behaviour of manufacturing firms in the United Kingdom. To isolate the impact of participation in export markets we use nearest neighbour matching. For 1988-2002, we find evidence that spillovers associated with agglomeration can raise the probability of export market entry and once entry has occurred there may be additional productivity benefits. Survival is driven partly by size and total factor productivity and partly by industry characteristics.     

Infrastructure regulation and reallocations within industry: Theory and evidence from Indian firms

Many firms in developing countries adopt captive power generators to deal with expensive and unreliable supply of electricity. I present a model that combines upstream regulation with downstream heterogeneous firms in a monopolistic competition framework, where firms can pay a fixed cost to adopt this marginal cost-reducing device. The presence of captive power affects the market equilibrium by increasing the level of idiosyncratic productivity a firm needs to survive in the market and by re-allocating sales and profits towards the more productive, adopting firms. Additionally, the rate of adoption is shown to increase with the price of electricity, industries' electricity–intensity and with higher barriers to firm entry. The mechanisms I propose are present for a cross-section of Indian firms.     

Firm-Level TFP Growth in the Chinese Automobile Industry

China has been the world’s largest automobile producer since 2009,but it still lags behind other countries in terms of productivity. Based on theNational Bureau of Statistics of China (NBSC) firm-level data and the improvedapproach proposed by Ackerberg et al. (2015), this paper investigates thecontribution of total factor productivity (TFP) growth to the Chinese automobileindustry and evaluates the impact of firm entry and exit on TFP growth. Theempirical results show that the TFP of the Chinese automobile industry grows at10.7% per year. Joint venture and foreign-owned firms have a significantly higherTFP growth rate than others. Large-scale firms have a higher TFP growth rate thando small-scale firms, but the latter have caught up after 2004. Moreover, the entryof new firms and exit of old firms significantly improve the aggregate TFP growthrate.     

Firm exit,technological progress and trade

The dynamics of export market exit and firm closure have found limited attention in the new heterogeneous-firms trade literature. In fact, several of the predictions on firm survival and exit stemming from this new class of models are at odds with the stylized facts. Empirically, higher productivity firms survive longer, most firm closures are young firms, higher productivity exporters are more likely to continue to export compared to less productive exporters and market exits as well as firm closures are typically preceded by periods of contracting market shares. The present paper shows that the simple inclusion of exogenous economy wide technological progress into the standard Melitz (2003) model generates a tractable dynamic framework that generates endogenous exit decisions of firms in line with the stylized facts. Furthermore, we derive the effects of faster technological progress and trade liberalization on export market exit and firm closure.     

Foreign direct investment in R&D and domestic entrepreneurship in China’s manufacturing industries

This paper argues that internationalization of innovation and the related spillovers can also affect the likelihood of firm entry and exit into an industry. By making use of firm-level panel data from China over the period 2005 to 2007, this paper examines the impact of foreign direct investment (FDI) in research and development (R&D) and the related linkages on entry and exit likelihoods of domestic firms in (i) transport equipment and (ii) electrical machinery and equipment manufacturing industries. In order to evaluate the region-of-origin effect, this paper also separately examines the impact of FDI in R&D originating from (i) all countries except Hong Kong, Macau and Taiwan and (ii) Hong Kong, Macau and Taiwan. Furthermore, the impact of FDI in R&D on entry and exit of Chinese firms in the two industries is examined by splitting the data into large and small firms within the two industries. The results of the pooled probit regression reveal that FDI in R&D and the related spillovers can have a significant impact on the likelihood of entry and exit of domestic firms in transport equipment and electric machinery and equipment industries. The empirical analysis also suggests that the impact of changes in FDI in R&D and the related spillovers varies across firm size.     

Competition and ownership structure: Substitutes or complements? Evidence from the Warsaw Stock Exchange

In this paper we analyse the impact of product market competition and ownership structure on firm performance. Our results show that product market competition has a positive and significant impact on performance. Concerning the effect of ownership concentration, we find a U–shaped relationship with performance. Firms with relatively dispersed and relatively concentrated ownership have higher productivity growth than firms with an intermediate level of ownership concentration. This correlation between concentration of ownership and productivity growth is not explained by the type of the controlling shareholder. Finally, product market competition and good governance tend to reinforce each other rather than to be substitutes. Competition has no significant effect on performance for the firms with ‘poor’ governance; on the contrary, it has a significant positive effect in the case of firms with ‘good’ corporate governance. JEL classification: D24, G32, L1, P2.     

Environmental protection without loss of international competitiveness

We develop a two‐country Cournot oligopoly model with product differentiation across countries and production‐generated pollution. The abatement of pollution by the firms in response to emission taxes is endogenous, and the number of firms can be fixed or there may be free entry and exit of firms in both countries. We propose particular unilateral and multilateral piecemeal policy reforms of emission taxes and production subsidies such that domestic industries will not suffer any loss of international competitiveness (defined in terms of either market share or profits), emission levels will be lower, and welfare could be higher in both countries.     

Technology diffusion and growth

Suppose firms are subject to decreasing returns and permanent idiosyncratic productivity shocks. Suppose also firms can only stay in business by continuously paying a fixed cost. New firms can enter. Firms with a history of relatively good productivity shocks tend to survive and others are forced to exit. This paper identifies assumptions about entry that guarantee a stationary firm size distribution and lead to balanced growth. The range of technology diffusion mechanisms that can be considered is greatly expanded relative to Luttmer (2007) [21]. If entrants can make only small improvements over the technologies used by the least productive incumbents, then the firm size distribution approximates Zipf?s law and entry and exit rates are high, as in the data.     

International Trade,Offshoring and Heterogeneous Firms

Recent trade models determine the equilibrium distribution of firm‐level efficiency endogenously and show that freer trade shifts the distribution towards higher average productivity because of entry and exit of firms. These models ignore the possibility that freer trade also alters the firm‐size distribution via international firm migration (offshoring); firms must, by assumption, produce in their “birth nation.” We show that when firms are allowed to switch locations, new productivity effects arise. Freer trade induces the most efficient small‐nation firms to move to the large nation. The large country gets an “extra helping” of the most efficient firms while the small nation's firm‐size distribution is truncated on both ends. This reinforces the large‐nation productivity gain while reducing or even reversing the small‐nation productivity gain. The small nation is nevertheless better off allowing firm migration.     

Advertising, Generic Competition and Price Regulation in Pharmaceutical Markets

The effect of price regulation on generic market entry and welfarein the presence of (persuasive) advertising is analysed. Anincumbent has the possibility to invest in advertising targetedat the physician. Advertising creates vertical product differentiationbetween brand-name drugs and its generic substitutes. This differentiationcreates the possibility to make positive profits for both firms.The presence of price regulation, however, reduces the anticipatedgeneric profits. If price regulation is too strict, then thegeneric firm will refrain from market entry. Hence, the modelconfirms the empirical observation that generic market sharesare lower in countries with strict price regulation. (JEL: I11,L13)     

EXPORT‐MARKET DYNAMICS AND THE PROBABILITY OF FIRM CLOSURE: EVIDENCE FOR THE UNITED KINGDOM

This study presents the first empirical analysis of the determinants of firm closure in the United Kingdom with an emphasis on the role of export‐market dynamics, using panel data for a nationally representative group of firms operating in all‐market‐based sectors during 1997–2003. Our findings show that the probability of closure is (cet. par.) significantly lower for exporters, particularly those experiencing export‐market entry and exit. Having controlled for other attributes associated with productivity (such as size and export status), the following factors are found to increase the firm's survival prospects: higher capital intensity and TFP, foreign ownership, young age, displacement effects (through relatively high rates of entry of firms in each industry), and belonging to certain industries. Interestingly, increased import penetration (a proxy for lower trade costs) leads to a lower hazard rate for exporting entrants and continuous exporters, while inducing a higher hazard rate for domestic producers or those that quit exporting.     

Sequential Entry in a Vertically Differentiated Market

This paper considers a sequential entry game of homogeneous firms in a vertically differentiated market. A firm can choose any variety of products, with a fixed cost per product. Each product can be withdrawn afterwards without exit costs. Then each firm chooses one product at most in equilibrium because of a commitment problem. The first firm chooses the highest quality if the fixed cost is so large that subsequent entry is blockaded. It chooses middle quality to deter entry of a low–quality firm if the fixed cost decreases. Hence everyone becomes worse off as the entrant becomes more dangerous. JEL Classification Numbers: D43, L13.     

INTERNATIONAL WELFARE AND EMPLOYMENT LINKAGES ARISING FROM MINIMUM WAGES*

We formulate a two‐country model with monopolistic competition and heterogeneous firms to reconsider labor market linkages in open economies. Labor market imperfections arise by virtue of country‐specific real minimum wages. Abstracting from selection of just the best firms into export status, standard effects on marginal and average firm productivity are reversed in our model, yet there are significant gains from trade arising from employment expansion. In addition, we show that with firm heterogeneity an increase in one country’s minimum wage triggers firm exit in both countries and thus harms workers at home and abroad.     

Productivity drivers of infrastructure companies: Network industries utilizing economies of scale in the digital era

What drives the productivity dynamics of infrastructure companies? Using a panel of firms in 14 countries, we study total factor productivity (TFP) enhancers of utility and network services companies. We find that moving TFP closer to the technological frontier drives productivity growth at higher speeds in Asian countries than in European countries. We also find that financial leverage exerts a positive effect on TFP growth for larger infrastructure firms and that more financially developed countries utilize economies of scale through better use of financial resources. Large utility and transportation companies display a higher rate of TFP growth, indicating that a competition policy to encourage M&As would be prudent for the utility/transportation sectors to maximize economies of scale. In contrast, we find diseconomies of scale for energy companies in some countries. Moreover, young network firms improve TFP growth faster than their peers in countries with fewer product market regulations. Therefore, policies should remove entry barriers while facilitating the departure of old and low-productivity firms from network markets. Finally, policymakers should offer well-targeted fiscal incentives for intangible investments to boost TFP because the accumulation of intangible assets such as digital technology promotes more scale economies through network effects.     

Sunk Costs,Firm Heterogeneity,Export Market Entry and Exit: Evidence from India

This paper analyses the role of sunk costs and firm heterogeneity in firm decision to enter and exit export markets. Employing rich firm-level data on Indian manufacturing firms, the study points out that sunk costs in terms of previous export experience significantly explain entry and exit decisions of firms in the export market. The first set of analysis involves estimation of dynamic discrete choice model using random effects probit correcting for initial conditions problem. We find evidence that previous export experience (sunk costs) matters for export decision. However, importance of sunk costs is found to depreciate rapidly. Further, analysis across sub-sample of firms accounting for firm heterogeneity factors like size and product level information supports the hypothesis of sunk costs. Second set of analysis involving firm survival in export markets using discrete-time hazard models shows evidence of negative duration dependence. We observe that those firms which continue to export for few years are less likely to exit from export markets.

     

Reform and competitive selection in China: An analysis of firm exits

This paper considers aspects of the competitive selection process in China – firm entry, survival, and exit – in an important sector of manufacturing, looking in particular for changes resulting from the process of reform. Using industry census data from a province in North-East China, we find substantial differences in the process between ownership types. By conducting decompositions of aggregate growth and exploring the determinants of firm's exit using a hazard rate model, we observe a substantial rate of churning of enterprises in the sector, finding that the competitive selection processes operate, for small and collectively owned enterprises (COEs), in a manner consistent with what is known about a private market economy. While the hazard for state owned enterprises (SOEs) is lower than for COEs, we find that the reforms introduced in 1992 were important in closing the gap for similarly situated firms.