- 24 Oct 2012
- Working Paper Summaries
Diasporas and Outsourcing: Evidence from oDesk and India
Diaspora-based exchanges have been important for centuries, but the online world reduces many of the frictions these networks solved. How do the Internet and diaspora networks connect? This study investigated the importance of Indian diaspora connections on the oDesk platforms for outsourcing. oDesk is the world's largest online labor market, processing $30 million per month in contracts as of May 2012. This research finds strong evidence that diasporas still matter and influence economic exchanges even when many frictions are minimized. In fact, the case study suggests more often than not that diaspora use increases as familiarity with the platform increases. This suggests a longer-term complementarity between diaspora networks and online tools that may aid the persistence of these networks. At the same time, the oDesk evidence also makes clear that the role of diaspora networks should not be overstated. While they contributed to India's success on oDesk, diaspora connections were clearly not a driving force in India becoming the top destination for oDesk contracts. Key concepts include: The frictions that online platforms like oDesk minimize are frictions that diaspora networks have historically been used to overcome. This makes their role for future economic exchanges uncertain. Diaspora connections still matter. Ethnic Indians working in countries outside of India are 32 percent (9 percentage points) more likely to choose a worker in India than non-ethnic Indians. Yet, even with the increased likelihood of outsourcing to India, diaspora connections played a very small role in India's rapid development on oDesk. In fact, diaspora connections appear to follow rather than lead the platform's development. Diaspora connections occur through the actions of many people in small ways and the extreme concentration of impact due to a few key people. Diasporas will continue to use online platforms in an effective manner, but diasporas will not be responsible for a country's overall success on the platform, at least in countries of moderate to large size. Closed for comment; 0 Comments.
- 29 Aug 2012
- Working Paper Summaries
Entrepreneurship and Urban Growth: An Empirical Assessment with Historical Mines
Does entrepreneurship cause urban growth? Economists and policymakers often argue yes, but it is remarkable how little is known about what lies behind this relationship. This paper investigates the connection more closely using a link between historical mineral and coal deposits and modern entrepreneurship observed in US cities today. Because the process of bringing ores out of the earth is a capital-intensive operation that often benefits from large-scale operations, cities with a historical abundance of nearby mineral and coal mines developed industrial structures with systematically larger establishments and less entrepreneurship. These early industrial traits persisted long after the initial conditions faded through intergenerational transmissions, path dependency, and similar. Using this variation, the study finds the strong connection between a city's initial entrepreneurship and subsequent economic growth is still observed after removing the most worrisome endogeneity. This connection works primarily through lower employment growth of startups in cities that are closer to mines. Key concepts include: Entrepreneurship plays an important role in modern urban growth. Entrepreneurship is systematically related to local employment growth over the past three decades for American cities. The casual relationship behind this correlation, however, has been hard to discern due to endogeneity of entry decisions (can be biased upwards or downwards). Proximity to historical mines provided past benefits to cities. Indeed, cities may have been founded precisely to exploit these deposits. These initial conditions, however, created industrial legacies that are not conducive to entrepreneurship today. Looking at US cities from the 1970s onwards, cities built near historical mines in 1900 have larger establishments, less entry for entrepreneurial firms, and less urban growth. This is relationship is true even in industries that are not directly related to mining, such as trade, finance, and services. These effects also hold in many different regions of the US. Using this empirical link to past mines, the causal nature of entrepreneurship for city growth can be more accurately assessed. The link holds up very well, usually suggesting that the basic correlation is approximately right. There are some limits, however, that the paper discusses that leads to cautious conclusions. The primary mechanism behind the linkage of entrepreneurship to urban growth is that it creates in cities an up-or-out dynamic for firms. Closed for comment; 0 Comments.
- 19 Apr 2012
- Working Paper Summaries
Is India’s Manufacturing Sector Moving Away from Cities?
One of the biggest challenges in development is urbanization. Within developing countries, nearly two billion people are expected to move from rural regions into cities in the next two decades. This paper closely examines the movement of economic activity in Indian manufacturing between urban and rural areas. The authors find that while the organized sector is becoming less urbanized, the unorganized sector is becoming more urbanized. This process has been most closely linked to greater urbanization changes in districts with high education levels; a second role is often evident for public infrastructure as well. On the whole, these urbanization changes have modestly improved the urban-rural allocation of industries within India's districts. Key concepts include: Much of the urbanization that is occurring is in the unorganized sector. Policies that take an inclusionary approach to the urban informal economy may be more successful in promoting local development and managing its strains than those focused only on the formal sector. Districts with better education and infrastructure have experienced a faster pace of urbanization, although higher urban-rural cost ratios cause movement out of urban areas. Observers have frequently noted the relatively slow pace of India's urbanization. Moreover, the movement of organized manufacturing sector plants to rural areas is surprising, given the relative youth of India's manufacturing sector. Continued investment in infrastructure and education, beyond their direct effects for Indian businesses, may also provide beneficial effects from an urbanization and spatial allocation perspective. The most urbanized states in terms of manufacturing employment are Delhi and Chandigarh at over 90 percent in 2000, with Gujarat, Haryana, Maharashtra, and Punjab also above 60 percent. However, Bihar, Orissa, and Himachal Pradesh have urbanization rates of less than 20 percent for manufacturing employment. Closed for comment; 0 Comments.
- 25 Jan 2012
- Research & Ideas
A Few Firms Have Outsized Influence in D.C.
New research by Harvard Business School Associate Professor William R. Kerr suggests the number of companies affecting government policy through lobbying may be smaller—but more powerful—than previously thought. Key concepts include: Relatively few companies lobby, larger firms are more likely to lobby than smaller ones, and firms that do lobby are likely to do so year after year. The findings can be explained in part by high fixed costs to enter the lobbying club—both in the costs of hiring well-paid lobbyists and in complying with reporting requirements. The small number of corporations that are consistently influencing government policy do so on a whole host of issues—some of which may be important to them, and some of which may be tangential. Open for comment; 0 Comments.
- 20 Jan 2012
- Working Paper Summaries
Income Inequality and Social Preferences for Redistribution and Compensation Differentials
Market-based factors have substantially increased inequality in the United States over the last three decades. If the inequality caused by these mechanisms reduces social preferences regarding distributive equality, the inequality can become amplified and entrenched. The potential thus exists for the formation of a "vicious cycle" where increases in disparity weaken concern for wage equality or redistribution. This weakened concern affords greater future compensation differentials, a shrinking of the welfare state, and so on that further increase inequality and again shift preferences. Alternatively, changes in social preferences can counteract inequality increases. William Kerr characterizes how changes in inequality affect social attitudes towards government-led redistribution and compensation differentials. The results of this study provide mixed evidence regarding the vicious-cycle hypothesis. Kerr's findings suggest that social preferences regarding inequality adjust to desire more redistribution while allowing greater labor market inequality. Key concepts include: Controlling for people's initial positions and views of social mobility, local changes in inequality are positively and significantly correlated with changes in support for government-led redistribution. While greater class conflict is perceived along income dimensions, the increases in support for redistribution among wealthy individuals are as strong as those of poorer individuals. The results of this study suggest that a short-term increase in inequality is unlikely to prompt a vicious cycle where support for redistribution declines, thereby promoting further increase in inequality. On the other hand, significant growth in proposed wage differentials are evident in the international analyses with higher inequality. While less than one-for-one, increases in inequality are associated with greater acceptance of wage disparities. This pattern suggests that labor market changes may reinforce inequality growth. How political systems are structured will govern whether rising latent concerns for redistribution produce higher effective support to which politicians are held accountable. Closed for comment; 0 Comments.
- 29 Nov 2011
- Working Paper Summaries
Local Industrial Structures and Female Entrepreneurship in India
Despite its recent economic advances, India's gender balance for entrepreneurship remains among the lowest in the world. Improving this balance is an important step for India's achievement of greater economic growth and gender equality. This paper uses detailed micro-data on the unorganized manufacturing and services sectors of India in 2000-2005 to identify and quantify the importance of existing female business networks for promoting subsequent entrepreneurship among women at the district-industry-year level. Key concepts include: Higher female ownership among incumbent businesses within a district-industry predicts a greater share of subsequent entrepreneurs will be female. Moreover, higher female ownership of local businesses in related industries—those sharing similar labor needs, industries related via input-output markets—predict greater relative female entry rates even after controlling for the focal district-industry's conditions. Among broader district-level traits, better local infrastructure strongly connects with higher relative female entry in both manufacturing and services. Local education and the female literacy rate further matter for services entry. Within manufacturing, female shares are highest and typically exceed 50 percent in industries related to chemicals and chemical products, tobacco products, and paper and paper products. At the opposite end, female shares of 2 percent or less are evident in industries related to computers, motor vehicles, fabricated metal products, and machinery and equipment. Among services industries, female ownership shares exceed 30 percent in industries related to sanitation and education. Lowest rates are in industries related to research and development, water transport, and land transport. Closed for comment; 0 Comments.
- 18 Nov 2011
- Working Paper Summaries
The Dynamics of Firm Lobbying
Lobbying is a primary avenue through which firms attempt to change policy in the United States, with total expenditures outnumbering campaign contributions by a factor of nine. While lobbying by businesses is a frequently debated issue, there has been little systematic empirical evidence on these behaviors at the firm level. This paper is one of the first to begin to fill this gap. To do so, the researchers constructed an empirical model of lobbying behavior of publicly traded, US-headquartered firms between 1998 and 2006. They also looked in depth at a specific policy shift that has been the subject of significant public debate: the dramatic decline in the limit on H-1B visas that occurred in 2004. Findings show that the decline in the limit on H-1Bs did not induce new firms to lobby that were not previously lobbying on other issues. The decline did, however, significantly shift lobbying resources towards high-skilled immigration issues amongst firms that had lobbied previously for other issues. Moreover, the manner in which this shift occurs among firms already lobbying indicates little constraint on adjustments across issues important for firms. Key concepts include: Few firms lobby, even among publicly traded firms, only 10 percent of the firms in this sample. Lobbying is strongly related to firm size — larger firms participate more than smaller ones. The probability that a firm lobbies in the current year given that it lobbied in the previous year is 92 percent. Up-front costs associated with beginning to lobby may be a deterrent for firms that do not lobby. The persistence induced by these costs likely allows firms and politicians to be able to predict what groups will work to support or oppose various policy changes. Moreover, stability in this relationship between government and firms may induce persistence in political and economic institutions or raise the prospects of regulatory capture. Closed for comment; 0 Comments.
- 10 Nov 2011
- Working Paper Summaries
Spatial Determinants of Entrepreneurship in India
In South Asia, which regional traits encourage local entrepreneurship? While multiple studies have considered this question in advanced economies, especially for the manufacturing sector, there has been very little empirical evidence for developing countries like India. While India has historically had low entrepreneurship rates, this weakness is improving and will be an important stepping stone to further development. In this paper, the authors explore the spatial determinants of local entrepreneurship in India for both manufacturing and services. At the district level, their strongest evidence points to the roles that local education levels and physical infrastructure quality play in promoting entry. They also find evidence that strict labor regulations discourage formal sector entry, and better household banking environments encourage entry in the unorganized sector. The paper then evaluates how incumbent industrial structures of cities shape the type of entrants that emerge in local areas. Startups are more frequent for a city in industries that share common labor needs or have customer-supplier relationships with the city's incumbent businesses. This is among the first studies to quantify the spatial determinants of entrepreneurship in India. Moreover, it moves beyond manufacturing to consider services, which are very important for India's economic growth. Key concepts include: India's economic geography is still taking shape since the deregulations of the 1980s and 1990s. The spatial distribution of startups in India is more fluid than in the United States. The two most consistent factors that predict overall entrepreneurship for a district are education and the quality of local physical infrastructure. These patterns are true for manufacturing and services. Like previous research, this paper also links strict labor regulations in India to slower economic growth and development. This pattern is especially apparent for the organized manufacturing sector where these laws are most binding. The incumbent compositions of local industries influence new entry rates at the district-industry level within manufacturing. This influence operates through channels like access to common labor resources or customer-supplier relationships. Closed for comment; 0 Comments.
- 14 Sep 2011
- Working Paper Summaries
Ethnic Innovation and US Multinational Firm Activity
What effects do immigrant scientists and engineers have on the global activities of the firms that employ them? To what extent do these high-skilled immigrants help US multinationals capitalize on foreign opportunities? Professors Foley and Kerr analyze key data concerning US patents, direct investment abroad, research and development, and the ownership structure of firms. They show that immigration enhances the competitiveness of US multinationals. Taken together, the results have implications for immigration policies. Many debates about immigration focus on the potentially deleterious impact of low wage immigrants on the domestic workforce. However, Foley and Kerr point out that immigrants who are skilled enough to engage in innovative activity generate benefits for firms that are seeking to do business abroad. Key concepts include: Immigrant scientists and engineers enhance the competitiveness of U.S. multinational firms in their home countries. The input of ethnic innovators makes the input of local partners less valuable and lowers entry barriers to foreign countries. U.S. multinationals are more likely to enter foreign countries with wholly-owned subsidiaries, as opposed to partially-owned ones, with the domestic support of immigrant scientists and engineers. Firms with more innovative activity performed by inventors of a certain ethnicity are more likely to conduct R&D and patenting in countries associated with that ethnicity. There is a particularly sharp rise in collaborative R&D that utilizes inventor teams spanning the United States and foreign countries. Closed for comment; 0 Comments.
- 01 Aug 2011
- Research & Ideas
Immigrant Innovators: Job Stealers or Job Creators?
The H-1B visa program, which enables US employers to hire highly skilled foreign workers for three years, is "a lightning rod for a very heated debate," says Harvard Business School professor William Kerr. His latest research addresses the question of whether the program is good for innovation, and whether it impacts jobs for Americans. Key concepts include: An uptick in the number of H-1B visas given to Indian and Chinese engineers correlates with an increase in the number of US patents. The H-1B program seems to have no overall effect on the number of jobs held by American-born scientists and engineers, nor does it affect the number of patents from inventors who have Anglo-Saxon names. Closed for comment; 0 Comments.
- 28 Jan 2011
- Working Paper Summaries
Agglomerative Forces and Cluster Shapes
HBS professor William R. Kerr and doctoral candidate Scott Duke Kominers develop a theoretical model for analyzing the forces that drive agglomeration, or industrial clustering. It is rare that researchers systematically observe the forces like technology sharing, customer/supplier interactions, or labor pooling that lead to firm clustering. Instead, the data only portray the final location decisions that firms make (for example, firms that utilize one type of technology are clustered over 50 miles, while those using another technology are clustered over 100 miles). The researchers' model identifies how these observable traits can be used to infer properties of the underlying clustering forces. Key concepts include: Most industries exhibit spatial clustering. The paper's framework provides a theoretical foundation for inferring properties of agglomerative forces through observed spatial concentrations of industries. The model demonstrates that agglomeration clusters generally cover a substantially larger area than the micro-interactions among firms upon which they build. This structure is present, for example, in the technology and labor flows in Silicon Valley. Agglomerative forces with longer micro-interactions are associated with fewer, larger, and less-dense clusters. These patterns are evident in both technology clusters and industrial agglomerations. Closed for comment; 0 Comments.
- 23 Nov 2010
- Working Paper Summaries
Growth Through Heterogeneous Innovations
Economists have long recognized that innovation is central to economic growth and development. But as a profession, economics is just beginning to model the many types of innovations that exist and the amazing heterogeneity in the firms that conduct research and development--from General Electric to Silicon Valley start-ups. This paper provides theoretical and empirical evidence surrounding how firm size influences the types of R&D undertaken, with particular focus on choices to pursue exploration R&D (capturing new product lines) versus exploitation R&D (refining current product lines internally). From the choices made by individual firms and new entrepreneurs, the model then builds to consider aggregate economic growth. Research was conducted by Ufuk Akcigit of the University of Pennsylvania and William R. Kerr of Harvard Business School. Key concepts include: Exploration R&D seeks to create new technologies and products for the company to build market leadership. Exploitation R&D focuses on improving existing product lines that the firm already owns, in order to build stronger profits. Large firms have many product lines and thus naturally engage in extensive exploitation R&D to improve their current technologies. Small firms and new start-ups have a comparative advantage for undertaking exploration R&D. Quantitative tests find that exploration R&D has had a greater spillover effect into economic growth than exploitation R&D in the United States over the last couple of decades. This illustrates one channel through which small, innovative businesses and start-ups can play an especially important role in economic growth. Closed for comment; 0 Comments.
- 14 Jul 2010
- Working Paper Summaries
From Russia with Love: The Impact of Relocated Firms on Incumbent Survival
The relocation of the machine tool industry from the Soviet-occupied zone of postwar Germany to western regions is a unique laboratory for studying the impact of industrial structures on incumbent survival. Typically, geographic agglomerations of similar firms offer benefits to each member firm by reducing the transportation costs for material goods, specialized workers, and industry knowledge among the firms. Of course, tight geographic concentration comes with countervailing costs as firms compete for local inputs. In this paper, HBS professor William R. Kerr and coauthors study the impact of increased local concentration on incumbent firms by considering postwar Germany, when the fear of expropriation (or worse) in the wake of World War II prompted many machine tool firm owners to flee to western Germany, where they reestablished their firms. Key concepts include: Relocations significantly increased the likelihood of incumbent failure, which suggests that the costs of increased competition for local inputs dominated the potential benefits from agglomeration economies. By contrast, during the same postwar period, new start-up entrants—whose location choices were more opportunistic—were not associated with increased incumbent failure rates. The increased failure rates of incumbents in western Germany due to relocating firms was concentrated in regions where labor forces were constrained due to low inflows of expellees from eastern Germany. In regions with a significant inflow of expellees and favorable input conditions, there was no effect of relocations on incumbent firms' risk of failure. The relocation of the machine tool industry from eastern to western Germany was substantial. In total, a fifth of the industry present in eastern Germany migrated during a narrow window of 1949-1956, representing an 8 percent increase in total industry size for the receiving zones. These location choices were made under extreme duress, with little regard to existing business conditions across regions in western Germany. Upon arrival, the relocating firms substantially impacted local industrial conditions as they quickly regained much of their former production capacity. Closed for comment; 0 Comments.
- 15 Apr 2010
- Working Paper Summaries
The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis
What difference do angel investors make for the success and growth of new ventures? William R. Kerr and Josh Lerner of HBS and Antoinette Schoar of MIT provide fresh evidence to address this crucial question in entrepreneurial finance, quantifying the positive impact that angel investors make to the companies they fund. Angel investors as research subjects have received much less attention than venture capitalists, even though some estimates suggest that these investors are as significant a force for high-potential start-up investments as venture capitalists, and are even more significant as investors elsewhere. This study demonstrates the importance of angel investments to the success and survival of entrepreneurial firms. It also offers an empirical foothold for analyzing many other important questions in entrepreneurial finance. Key concepts include: Angel-funded firms are significantly more likely to survive at least four years (or until 2010) and to raise additional financing outside the angel group. Angel-funded firms are also more likely to show improved venture performance and growth as measured through growth in Web site traffic and Web site rankings. The improvement gains typically range between 30 and 50 percent. Investment success is highly predicated by the interest level of angels during the entrepreneur's initial presentation and by the angels' subsequent due diligence. Access to capital per se may not be the most important value-added that angel groups bring. Some of the "softer" features, such as angels' mentoring or business contacts, may help new ventures the most. Closed for comment; 0 Comments.
- 27 Jan 2010
- Working Paper Summaries
Labor Regulations and European Private Equity
Recent theoretical models predict that countries with stricter labor policies will specialize in less innovative activities due to the higher worker turnover frequently associated with rapidly changing sectors. HBS visiting scholar Ant Bozkaya and HBS professor William R. Kerr examine how differences in labor regulations across European countries influence the development of private equity markets, comprised of venture capital and buy-out investors. In so doing, the researchers provide the first empirical evidence for this theoretical prediction at the industry level in the entrepreneurial finance literature. They also make a methodological contribution by demonstrating how jointly modeling the different policies for providing worker insurance delivers more consistent results than their individual relationships would indicate by themselves. Key concepts include: Policy choices regarding the optimal levels and mechanisms of labor market insurance are complex and should consider many economic and non-economic factors. Worker insurance policies favoring labor market expenditures (e.g., unemployment insurance benefits) over employment protection regulations encourage greater private equity entry and larger investment levels. This is true for both domestic investors and U.S.-inbound venture capital investments. This effect is conditional on the level of worker insurance provided, which is of lesser importance for private equity patterns than the policy mechanisms employed. Closed for comment; 0 Comments.
- 08 Oct 2009
- Working Paper Summaries
Clusters of Entrepreneurship
Economic growth is highly correlated with an abundance of small, entrepreneurial firms. This relationship is even stronger looking across industries within cities, and has been taken as evidence for competition spurring technological progress, product cycles where growth is faster at earlier stages, and the importance of entrepreneurship for area success. Any of these interpretations is possible, however, and the only thing that we can be sure of is that entrepreneurial clusters exist in some areas but not in others. This paper first documents systematically some basic facts about average establishment size and new employment growth through entrepreneurship, then analyzes entry and industrial structures at the region and the city levels using the Longitudinal Business Database. Key concepts include: There is a remarkably strong correlation between smaller average firm size and subsequent employment growth due to start-ups. Evidence does not support the view that regional differences in demand for entrepreneurship are responsible for these entrepreneurial clusters. Instead, the evidence suggests that spatial differences in the fixed costs of entrepreneurship and/or in the supply of entrepreneurs best explain cluster formation. Closed for comment; 0 Comments.
- 30 Sep 2009
- Working Paper Summaries
Breakthrough Inventions and Migrating Clusters of Innovation
In just a short period of time the spatial location of invention can shift substantially. The San Francisco Bay Area grew from 5 percent of U.S. domestic patents in 1975-1984 to over 12 percent in 1995-2004, for example, while the share for New York City declined from 12 percent to 7 percent. Smaller cities like Austin, Texas, and Boise, Idaho, seem to have become clusters of innovation overnight. Despite the prevalence of these movements, we know very little about what drives spatial adjustments in U.S. invention, the speed at which these reallocations occur, and their economic consequences. In this paper, HBS professor William R. Kerr investigates whether breakthrough inventions draw subsequent research efforts for a technology to a local area. Evidence strongly supports the conclusion that centers of breakthrough innovations experience subsequent growth in innovation relative to their peer locations. Key concepts include: Breakthrough inventions spur higher subsequent growth in innovation within a local area and technology compared to peer locations that, for example, have the same overall numbers of patents and similar technologies at the time when the breakthrough occurred. The underlying mobility of the workforce is quite important for the speed at which spatial adjustments occur. Immigrants, and particularly new immigration to the United States, can facilitate faster spatial reallocation. Closed for comment; 0 Comments.
- 11 Sep 2009
- Working Paper Summaries
Financing Constraints and Entrepreneurship
Financing constraints are one of the biggest concerns impacting potential entrepreneurs around the world. Given the important role that entrepreneurship is believed to play in the process of economic growth, alleviating financing constraints for would-be entrepreneurs is also an important goal for policymakers worldwide. In this paper HBS professors William R. Kerr and Ramana Nanda review two major streams of research examining the relevance of financing constraints for entrepreneurship. They then introduce a framework that provides a unified perspective on these research streams, thereby highlighting some important areas for future research and policy analysis in entrepreneurial finance. Key concepts include: Promoting entrepreneurship is an important goal of many governments, and researchers need to define for policymakers a more unified perspective for how studies and samples fit together. The "slice" of entrepreneurship examined is very important for the appropriate positioning of research on financing constraints, but studies too often fail to consider this dimension in the conclusions drawn from empirical results. The framework presented here is useful for thinking about the appropriate role of public policy in stimulating entrepreneurship. Closed for comment; 0 Comments.
- 11 Sep 2009
- Working Paper Summaries
Banking Deregulations, Financing Constraints and Firm Entry Size
How do financing constraints on new start-ups affect the initial size of these new firms? Since bank debt comprises the majority of U.S. firm borrowings, new ventures are especially sensitive to local bank conditions due to their limited options for external finance. Liberalization in the banking sector can thus have important effects on entrepreneurship in product markets. As HBS professors William Kerr and Ramana Nanda explain, the 1970s through the mid-1990s was a period of significant liberalization in the ability of banks to establish branches and to expand across state borders, either through new branches or through acquisitions. Using a database of annual employment data for every U.S. establishment from 1976 onward, Kerr and Nanda examine how U.S. branch banking deregulations impacted the entry size of new start-ups in the non-financial sector. This paper is closely related to their prior work examining how the deregulations impacted the rates of startup entry and exit in the non-financial sector. Key concepts include: The average entry size for start-ups did not change following the bank deregulations. However, this result masks the differences in entry size among startups that failed within three years of entry and those that survived for four years or more. Start-ups that survived for four years or longer entered at 2% larger sizes after the deregulations compared to earlier periods. Entrants that failed within three years did not enter at larger firm sizes. It is a challenge to measure accurately changes in the initial size of new firms even using micro-data such as that from the U.S. Census Bureau. Carefully characterizing effects of financing constraints on the initial size of new firms theoretically and empirically is an important research topic for entrepreneurial finance. Closed for comment; 0 Comments.
Innovation, Reallocation, and Growth
Industrial policies that subsidize (often large) incumbent firms, either permanently or when they face distress, are pervasive. Despite the ubiquity of such policies, their effects are poorly understood. They may encourage incumbents to undertake greater investments, increase productivity, and protect employment. But they may also reduce economic growth by discouraging innovation by both entrants and incumbents and slowing down reallocation. The reallocation implications of such policies may be particularly important because the existing literature attributes as much 80 percent of productivity growth in the United States to reallocation when less efficient firms exit and more efficient firms enter. In this paper, the authors build a model of firm innovation and growth that enables an examination of the forces jointly driving innovation, productivity growth, and reallocation. This model fits the key moments from microdata reasonably well, and is in line with the range of micro estimates in the literature. Key concepts include: This general equilibrium model, incorporating both reallocation and selection effects, highlights the potential pitfalls of industrial policies supporting incumbents, particularly large incumbents. Industrial policies (subsidies to incumbent R&D or to their operating costs) reduce growth and welfare, while entry subsidies have a positive but very small effect. Optimal policy, which can have substantial innovation and growth gains, simultaneously encourages the exit of under-performing incumbent firms and supports R&D by high-type incumbents and new entrants. Closed for comment; 0 Comments.