Evidence of creative destruction in the U.S. economy

Schumpeter discusses the importance of innovation and new firm entry in a capitalistic economy as a means to creatively destruct oligopolies and generate new economic wealth. He warns of R&D becoming the arena of professional engineers in large corporations; Schumpeter feared the obsolescence of entrepreneurship would result in an increasing concentration of wealth among large corporations and toward socialism.Using a longitudinal data base of U.S. corporations over the period 1961–1980, this paper statistically tests several aspects of Schumpeter's analysis. Overall our results give some support to Schumpeter's creative destruction hypothesis, though there exists some sensitivity to the measure of size used. We find most of the firms exiting the ranks of the largest 500 firms (as measured by assets) are those with ranks in the 401–500 range; there is also evidence of churning as the same firms enter and exit the top 500 over time. Additionally, we find that merger has gained prominence as the reason why firms exit the top 500. Among our conclusions is that further work is needed on the role of mergers in the growth-and decline-of entrepreneurial firms.     

Does FDI Spur Productivity,Knowledge Sourcing and Innovation by Incumbent Firms? Evidence from Manufacturing Industry in Estonia

Does FDI affect knowledge sourcing activities, innovation and productivity growth of domestic firms? This study employs firm‐level panel data from Estonia’s manufacturing sector to investigate different channels through which FDI affects domestic firms. Based on instrumental variables approach, I find no evidence of an effect of FDI entry on local incumbents’ short‐term productivity growth. However, there is positive association between the entry of FDI and the more direct measures of spillovers. FDI inflow to a sector is associated with more knowledge flows to domestic firms and increase in their innovation activities.     

The effect of firm formation and growth on job creation in the United States

This paper demonstrates the importance of new firm formation to economic growth. It begins by providing data that describe the United States as having had greater employment growth than most developed nations of the world over the last 25 years, and focuses upon why job growth in the United States has exceeded that of other nations.Job Creation by Firm Size. We first examine the data on the relative contribution of small and large firms to U.S. job growth. By summarizing research that is uniformly expressed in two-year periods and defines small firms as those with less than 100 employees, conclusive evidence emerges that small firms are the major sources of net new creation.Firm Entry/Exit Rates and Economic Growth. Further understanding of small firm job creation is obtained when we examine firm entry and exit data. Here we find that firm entry rates vary considerably from period to period (range: 10.4%–12.5%), whereas exit rates remain relatively stable from period to period (range: 9.6%–10.4%). Thus, variation in entrepreneurial activity—the formation of new firms—is the major cause of net increases in the number firms. In both the United States and the United Kingdom, net firm increases are positively related to overall economic activity.Firm Entry/Exit and Job Creation. Further exploration of this correlation can be conducted by examining job creation and loss defined by source: entries, expansions, exits, and contractions. The data for 1976 through 1984 shown here demonstrate that new entries account for 74.0% of the 50.8 million new jobs created. Expansions of existing firms accounted for 26.0%. Small firms (less than 500 employees) produced 54.6% of the entry jobs and 56.8% of the expansion jobs.On the other hand, job losses totaled 33.8 million, 79.0% due to exits and 21.0% to contractions. Small firms account for 53.6% of the jobs lost from exits and 47.8% of those lost from contractions. Overall, small firms account for 60.5% of the 17.0 million net new jobs.Given the data that show correlation between net firm formation rates and economic growth, the finding that entry rates vary more than exit rates, and the finding that new entries create most of the new jobs, it can be concluded that firm formation—especially small firm formation—is a significant factor in economic growth. Increases in small firm formation rates have a significant effect on net job creation.Schumpeter's Model and Observed Market Turbulance. Another finding from this data on job creation by entry, expansion, exit, and contraction is the large amount of job creation and destruction activity taking place. For the period studied, three jobs were created and two jobs destroyed for each net new job created. This describes a turbulent job market with many workers moving from job to job. The labor markets are much less stable that normally envisioned.This observed phenomenon fits well with Schumpeter's theory of capitalism; he proposes that capitalistic growth occurs because entrepreneurs use innovations to form new firms which enter existing markets. When successful, these growing new firms destroy existing market structures, causing decline of established firms while creating increased demand and producing overall economic growth. If Schumpeter is correct, one would expect to find high rates of firm formation and failure, and large numbers of jobs created by new firms, while many jobs are lost by exits and contractions of established firms. The findings reported here show this.Government Policy Affects on Entry/Exit. Our results also show that formation of small, new firms is a necessary requirement for economic growth. Historically, however, Government policy has not considered small firm entry as a central issue. Thus, government policies can and have had a negative effect on entry rates and therefore upon economic growth rates.Furthermore, high rates of new firm formation cause a great deal of turbulence in labor markets, with three jobs created and two lost for every one net new job. Such labor turbulence may be seen by policy makers as undesirable as it entails considerable worker movement from job to job. As such, policy makers have recently proposed policies to protect workers from job loss due to contractions and exits. However, such protection policies, as demonstrated in recent European experience, will also construct barriers to entrepreneurial entry. The result may be a decline in small firm entry and a decline in economic growth.Instead of protecting specific jobs, appropriate policies are those that facilitate movement of workers from job to job. Adequate unemployment compensation for short term unemployment, fully vested and portable pension plans, and retraining programs are examples of policies that allow the labor market to remain flexible while reducing the negative effect on those who lose jobs.     

Infant industry protection and industrial dynamics

A perennial case for industrial policy is based on the protection of young or emerging industries. Despite a natural association with concepts of life cycles, industrial policy has not been analyzed in the context of an industry life-cycle model. In particular, an important life-cycle characteristic, the potential for very large changes in the rate of net entry, is ignored. In this paper, we demonstrate how the impact of industrial policy depends critically on the entry and exit dynamics within an industry. We construct a model of technology adoption in which the number of firms is endogenous, and derive a set of novel predictions about the effects of protection on firm technology decisions. Specifically, we show that permanent protection can induce earlier adoption, but also decreases the probability that a given firm adopts the new technology. Likewise, we demonstrate that reducing the duration of protection results in faster adoption than permanent protection, but also reduces a given firm's probability of adoption. Finally, we show that, for industries characterized by flexibility in firm numbers, protection does not change the rate of technology adoption but does increase the size and probability of a shakeout (large scale net exit).     

Strategic entry or strategic exit? International presence by emerging economy enterprises

By proposing an integrated strategic choice framework, we theorize the distinctive dynamics of international expansion by emerging economy enterprises. Specifically, we explicate how these firms build international presence based on combined strategic entry (i.e., prompted by internal capabilities such as innovation and diversification) and strategic exit (i.e., pushed out by external handicaps at home such as institutional obstacles and market competition). Further, a firm’s cooperative ties with foreign multinationals in the former’s home country fortify the strategic entry intent, while ties with home government institutions weaken the strategic exit intent. We also demonstrate that building international presence helps bolster firm performance, highlighting the economic catch-up consequence of international expansion. Analyses of a two-year imbalanced panel data of 2136 firms statistically support our hypotheses.     

Heterogeneous Distributions of Firms Sustained by Innovation Dynamics—A Model with Empirical Illustrations and Analysis

This paper develops a framework of innovation dynamics to appreciate observed heterogeneity of firm size distributions, in which dynamics refer to exit and entry of product varieties and variety markets of individual firms. The analysis is based on a model of variety-triplets where every such triplet in the economy is identified by a unique combination of a variety, destination and firm. New variety triplets are introduced by innovating firms in a quasi-temporal setting of monopolistic competition. Ideas for variety-triplets arrive to firms according to a firm-specific and state dependent Poisson process, whereas variety triplets exit according to a destination-specific Poisson process. The empirical analysis employs a detailed firm-level data base which provides information about all variety triplets. Firm size is measured by a firm??s number of variety triplets. The empirical results are compatible with the model predictions of (i) a persistent distribution of firm sizes, (ii) frequent events of exit and entry, and (iii) state dependent entry, where a state may be given by each firm??s composition of triplets and/or other firm attributes.     

Measuring Innovation in European Industry

This paper analyses the results of the 1993 Community Innovation Survey (CIS). Fifty per cent of European firms introduced a product or process innovation during 1990-92. The share of innovating firms varies between industrial sectors and firm size. The percentage of innovating firms is higher for large firms than for smaller ones. In high-tech sectors this share is two thirds and for traditional ones is one third. The largest part of firms' expenditure for innovation is linked to the adoption and diffusion of technologies through machinery and equipment, which absorbs 50% of firms' innovation expenditure. R&D activities represent, on average, 20% of total innovation expenditure while other innovative activities, such as design and trial production, account respectively for 10% and 11%. The mix of innovation inputs, especially R&D and investment, is strongly correlated with firm size, displays little change across countries and varies greatly across industries.     

Creative destruction and regional productivity growth: evidence from the Dutch manufacturing and services industries

Do firm entry and exit improve the competitiveness of regions? If so, is this a universal mechanism or is it contingent on the type of industry or region in which creative destruction takes place? This paper analyses the effect of firm entry and exit on the competitiveness of regions, as measured by total factor productivity (TFP) growth. Based on a study across 40 regions in the Netherlands over the period 1988–2002, we find that firm entry is related to productivity growth in services, but not in manufacturing. The positive impact found in services does not necessarily imply that new firms are more efficient than incumbent firms; high degrees of creative destruction may also improve the efficiency of incumbent firms. We also find that the impact of firm dynamics on regional productivity in services is higher in regions exhibiting diverse but related economic activities.     

Organizational innovation as an enabler of technological innovation capabilities and firm performance

This study assesses the relationship between organizational innovation and technological innovation capabilities, and analyzes their effect on firm performance using a resource-based view theoretical framework. The article presents empirical evidence from a survey of 144 Spanish industrial firms and modeling of a system of structural equations using partial least squares. The results confirm that organizational innovation favors the development of technological innovation capabilities and that both organizational innovation and technological capabilities for products and processes can lead to superior firm performance.     

Patterns of Entry,Post-Entry Growth and Survival: A Comparison Between Domestic and Foreign Owned Firms

This study compares the patterns of entry, survival and growth of domestic and foreign owned firms. We show that the post-entry behavior of foreign owned firms is quite different from that of their domestic counterparts. Among foreign entrants, we were able to distinguish between those which proceed by creating a new firm and those that acquire an already existing business. Our evidence reveals that the choice of the mode of entry in foreign markets exerts an impact upon the performance of firms that persists long after the moment of entry. As a consequence, our work clearly indicates that there is much to be gained in the understanding ofthe process of entry in foreign markets by studying the behavior of entrants over their first years in these markets.     

Linking net entry to regional economic growth

Regional growth differentials could be explained by how intensively and dynamically new firms of a particular region enter expanding industries. Although the direct contribution of new firms to value creation and growth may be regarded as tautological, the aggregate impacts are largely empirically unobserved. After a brief motivation, we use an expression of firm net entry as an indicator of the distinctive capacity of regional entrepreneurial resources to enter new industries and create value. Using data for Belgian districts, we test the net entry effects on subsequent economic growth in the manufacturing and services industries. Our analysis helps emphasize the different dynamics at work within the manufacturing and services industries and, although requiring cautious interpretation, provides evidence for some positive impact of net entry on regional economic growth in the services industry.     

The Persistence of Profits,Sectoral Heterogeneity and Firms’ Characteristics

The analysis of the persistence of profits has long been a controversial issue within empirical industrial organisation literature. The aim of our paper is to provide new empirical findings that may account for patterns of both sectoral and firm profit persistence. The distinctive feature of our study is that we analyse a number of firms’ ergodic distribution in each sector according to their profit level; we then calculate the difference between such a distribution and that prevailing in manufacturing as a whole. Finally, we break down this distribution; the resulting breakdown highlights the impact of each transition probability on inter‐sectoral differences clearly, and it also emphasises the role of intra‐sectoral dynamics in determining different persistence patterns. We then apply this methodology to both innovating and non‐innovating firms, and conclude that among surviving firms innovation is indeed crucial to the persistence of profits. In addition, we set up an econometric test which enables us to estimate the impact of firm and sectoral characteristics on a firm’s profit condition.     

Market Incentives for Business Innovation: Results from Canada

Are more competitive industries more innovative? Empirical investigation into various theories of innovation in industrial organization, agency theory, or endogenous growth, make diverse predictions with respect to this long-standing open question in economics. In this paper, we investigate the empirical relationship between competition intensity and firm innovation using a new micro-database containing a large sample of Canadian manufacturing enterprises over the 2000–05 period. Using three different measures of competition intensity, we find evidence that competition intensity is positively related to firm-level expenditures on research and development (R&D) in Canadian manufacturing industries. However, we also find that this relationship is dampened when more firms are further from the technological frontier of their industry. Nevertheless, the results provide evidence for a Schumpeterian interpretation, whereby market power can increase business incentives for innovation when many firms are technological laggards.     

Firms size and R&D spillovers: Evidence from Italy

The recent emergence in the industrial organization literature of a wave of studies identifying small firms as more innovative than their larger counterparts poses something of a paradox? Where do small firms get their knowledge generating inputs? The purpose of this paper is to link innovative inputs to innovative outputs. This enables the identification of the extent to which spillovers exist from major sources generating new economic knowledge, such as the research and development (R&;D) laboratories of private and public firms, as well as universities, to the innovative activity of large and small enterprises. Based on twenty Italian regions over a period of nine years, the emprical evidence suggests that, while firm R&;D expenditures contribute to the generation of innovative output for all firms, as well as for large and small firms, the spillovers from university research are apparently more important for small-firm innovation than for large-firm innovation.     

Innovation,firm size,and firm age

This paper uses a new data set on innovation output to assess the degree to which the level of innovation in manufacturing firms is influenced by firm size and firm age. Indicators of innovation output used are the number of new products introduced as a function of firm sales and the proportion of firm sales obtained from products first introduced in the previous five years. While the evidence is mixed, the results tend to indicate that it is possible to separate the effects of age and size in assessing the level of innovation. Both firm size and firm age tend to be inversely related to innovative output.     

客户群体特征对企业创新绩效的影响研究——以中国制造业上市公司供应链为例

通常认为,供应链下游在地理空间上的集聚会促进信息交互和组织学习,强化核心企业的话语权,提升创新绩效。文章认为,在特定条件下,客户地理邻近也可能会拉低企业创新绩效,形成创新“空间锁定”困局。基于2009-2017年中国A股制造业上市公司及其供应链数据,考察客户地理邻近性对企业创新绩效的影响作用,并将客户集中度和客户属地多样性作为情境因素纳入研究框架。研究发现：客户地理邻近性与企业创新绩效呈倒U型关系,在一定阈值范围内客户地理邻近性拉升企业创新绩效,而超过该阈值客户地理邻近性抑制企业创新绩效;客户集中度对客户地理邻近性与企业创新绩效的关系不存在调节效应;客户属地多样性强化了客户地理邻近性与企业创新绩效的倒U型关系。以上结论从供应链视角揭示企业创新规律,对企业创新的内生机制研究形成了有益补充,有助于重新认识企业创新绩效的影响机制。     

Learning by exporting: Lessons from high-technology SMEs

We investigate the learning by exporting hypothesis by examining the effect of exporting on the subsequent innovation performance of a sample of high-technology SMEs based in the UK. We find evidence of learning by exporting, but the pattern of this effect is complex. Exporting helps high-tech SMEs innovate subsequently, but does not make them more innovation intensive. There is evidence that consistent exposure to export markets helps firms overcome the innovation hurdle, but that there is a positive scale effect of exposure to export markets which allows innovative firms to sell more of their new-to-market products on entering export markets. Service sector firms are able to reap the benefits of exposure to export markets at an earlier (entry) stage of the internationalization process than are manufacturing firms. Innovation-intensive firms exhibit a different pattern of entry to and exit from export markets from low-intensity innovators, and this is reflected in different effects of exporting.     

Managerial Firms,Entry, and Switching Costs

Empirical evidence shows that switching costs are important in many industries. We analyze the welfare effects of entry into markets with switching costs when firms can be run by managers and the entrant may be partially foreign-owned. We find that with profit-maximizing firms, the welfare effect of entry depends crucially on the ownership of the entrant firm. We also show that entry is less likely with managerial firms than it is with profit-maximizing firms. In the latter case, entry always reduces welfare if the share of the entrant firm owned by foreign investors is high. However, with managerial firms, entry always increases welfare.     

Export Premium,Self‐selection and Learning‐by‐Exporting: Evidence from Chinese Matched Firms

This study empirically focuses on examining the hypotheses of export premium (exporters are more productive than non‐exporters), selection‐into‐exporting (more productive firms are ones that tend to become exporters) and learning‐by‐exporting (new export market entrants have higher productivity growth than non‐exporters in the post‐entry period). The propensity score matching method is used to adjust for observable differences of firm characteristics between exporters and non‐exporters, allowing an adequate ‘like‐for‐like’ comparison. We also use the difference‐in‐difference matching estimator to capture the magnitude of different productivity growth between matched new export market entrants and non‐exporters in the post‐entry period up to two years. Drawing on 2,340 Chinese firms in the period 2000–02, we find evidence for export premium and self‐selection, and once the firm has entered the export market there is additional productivity growth from the learning effect, in particular in the second year after entry.