the impact of industrial policy on firm dynamics, factor reallocation, and aggregate productivity...

The Impact of Industrial Policy on

Firm Dynamics, Factor Reallocation, and

Aggregate Productivity Growth

Ufuk Akcigit

University of Pennsylvania & NBER

OECD - September 26, 2014

Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 1

Background

Understanding the aggregate implications of growth & industrialpolicies requires a good understanding of micro players of themacroeconomic system.

Reaction of macroeconomy to policy is a system-wide response.

The question is: How do we go from partial equilibrum tosystem-wide responses?

This is where going from micro-to-macro becomes crucial.

Many policies that we think will be good in partial equilibriummight have totally different general equilibrium impacts:

Aggregate price effectCompetition effectComposition/Reallocation effect

What is Our Research Approach?

Start with empirical regularities in the micro data

Motivated by those regularities, construct a general equilibriumtheory of firm dynamics and aggregate growth

Estimate the structural parameters of the model using micro-leveldata

Conduct counterfactual policy experimentsIncumbent R&D subsidyEntry subsidySubsidy to incumbent fixed operation cost

Today’s Roadmap

1 Factor reallocation in developed countries

2 Factor reallocation in developing countries

3 Reallocation of ideas

SECTION 1:FACTOR REALLOCATION

IN DEVELOPED COUNTRIES

The Model Economy

quality level

sector j

US Economy

The Model Economy

quality level

sector j

GDP = Sectors combined

Sector-specific Productivities

quality level

sector j

Example of a Firm

quality level q

sector j

Example of another Firm

quality level q

sector j

Productivity Growth: Internal R&D

quality level q

sector j

internal R&D

Productivity Growth: Internal R&D

quality level q

sector j

internal R&D

Productivity Growth: External R&D

quality level q

sector j

External R&D

Productivity Growth: External R&D

quality level q

sector j

External R&D

Reallocation is Taking Place...

quality level q

sector j

External R&D

Competition Creates Selection

quality level q

sector j

External R&D

Eventually Some Firms Exit

quality level q

sector j

External R&D

In the Meantime...

quality level q

sector j

Some New Entrants Show Up

quality level q

sector j

new entrants

And New Entrants Replace Incumbents

quality level q

sector j

General Equilibrium Effects of an Entry Subsidy

Aggregate price effect

Competition effect

Composition/Reallocation effect

Competition effect

R&D Input prices, wages/salaries, will increase.

Competition effect

Entrepreneurial talent is heterogeneous.

Competition effect

Some are good entrepreneurs and some are bad:

Competition effect

Some are good entrepreneurs and some are bad:

Acemoglu, Akcigit, Bloom, Kerr (2013)

We estimate this model using US firms.

Data: Census of Manufacturing

Method: Simulated Method of Moments

We estimate this model using US firms.

Data: Census of Manufacturing

Method: Simulated Methods of Moments

4.2 Goodness of Fit

Table 2 reports the empirical moments that we target and the predicted values from our model.

The addition of dashed lines in Figures 2A-D for the model-implied moments provides a graphical

depiction (except for moments 20 and 21, which are not shown in these �gures).

Table 2. Moment Matching

# Moments Model Data # Moments Model Data1. Firm Exit (small) 0.086 0.093 12. Sales Growth (small) 0.115 0.051

2. Firm Exit (large) 0.060 0.041 13. Sales Growth (large) -0.004 0.013

3. Firm Exit (young) 0.078 0.102 14. Sales Growth (young) 0.070 0.071

4. Firm Exit (old) 0.068 0.050 15. Sales Growth (old) 0.030 0.014

5. Trans. from large to small 0.024 0.008 16. R&D to Sales (small) 0.097 0.099

6. Trans. from small to large 0.019 0.019 17. R&D to Sales (large) 0.047 0.042

7. Prob. of small (cond on entry) 0.539 0.715 18. R&D to Sales (young) 0.083 0.100

8. Emp. Growth (small) 0.063 0.051 19. R&D to Sales (old) 0.061 0.055

9. Emp. Growth (large) -0.007 0.013 20. 5-year Entrant Share 0.363 0.393

10. Emp. Growth (young) 0.040 0.070 21. Aggregate growth 0.022 0.022

11. Emp. Growth (old) 0.010 0.015

Figure 2A: Transition Rates Figure 2B: R&D Intensity

Figure 2C: Sales Growth Figure 2D: Employment Growth

Our estimation procedure generates a relatively good �t for all of the moments. In particular, for

most of the moments our model is able to replicate the salient characteristics of data, including lower

exit rates for larger and older �rms, similar transition rates across �rms sizes and entry/exit, similar

R&D/sales intensities by �rm sizes and ages, and a reasonably good �t for sales and employment

growth across di¤erent types of �rms. Our growth rates for larger �rms are slightly negative in the

Findings:

Subsidy to incumbent R&D is not boosting growth.

Subsidy to entry is not boosting growth.

Taxing incumbent’s fixed operations increases growth byexploiting the selection/reallocation margins.

Findings:

SECTION 2:FACTOR REALLOCATION

IN DEVELOPING COUNTRIES

Firm Dynamics in Developing Countries

Graph from Hsieh and Klenow (2014).

�Figure�1:��Plant�Employment�by�Age�in�the�Cross�Section�

Mexico

<5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 >=40

Sources:�1994�1995�ASI�NSS�(India),�2003�Economic�Census�(Mexico),�and�2002�Manufacturing�Census�(U.S.).

�Figure�1:��Plant�Employment�by�Age�in�the�Cross�Section�

Mexico

<5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 >=40

Sources:�1994�1995�ASI�NSS�(India),�2003�Economic�Census�(Mexico),�and�2002�Manufacturing�Census�(U.S.).

Why does reallocation among firms not taking place in India?

Credit constraints?

Size-dependent Policies?

An interesting fact: The best predictor of firm size in India is....

Credit constraints?

FAMILY SIZE!

MAJOR OBSTACLE TO FIRM GROWTH:LACK OF DELEGATION

0 # of product lines, n

V(n) Vself(n)

Value Function as Contracts (µ) ImprovePage 1 of 1

9/24/2014file:///C:/Users/uakcigit/Dropbox/For%20Myself/Akcigit_Peters/Slides/Yale%202014/dele...

WE NEED TO ADD CONTRACTUAL FRICTIONS ON TOP OF THE

BASELINE FIRM DYNAMICS FRAMEWORK.

Value Function as Contracts (µ) Improve

Vself(n)

Vmanager(n)

Vself(n)

Vmanager(n)

Vself(n)

Vmanager(n)

Remark: Delegation is crucial for fighting decreasing returns.

Akcigit, Alp, Peters (2014)

Introduce contractual frictions between owners and managers.

Estimate the model using data on Indian economy.

Findings:Lack of delegation can account for 50% of the observeddifferences in factor reallocation in the US vs in India.

Industrial policies, such as increased entry or small businesssubsidies, are very ineffective in generating growth due toobstacles in delegation.

Findings:

Lack of delegation can account for 50% of the observeddifferences in factor reallocation in the US vs in India.

SECTION 3:REALLOCATION OF IDEAS

Safety Pin

Walter Hunt (1796-1859)

USPTO Patent Number 6281

1975 1980 1985 1990 1995 2000grant year

domestic only all

in % terms

Fraction of Patents Sold

Average = 5.5 years

0 4 8 12 16duration

in number of years

Patent Sale Duration

Empirical Facts We Document

1 Real sales and market value are negatively correlated with thedistance between a firm and its patents.

2 Patents which are more distant are more likely to be sold.

3 After a patent resale, the distance between a patent and its ownerdecreases.

Search-theoretic Model

γ , ′,

γ , pay P(x,z),

, earn q,, +qinnovate

don’t innovate

try to sell

don’t meet

1 ‐ i

1 /patent expires

don’t buy , ,

Akcigit, Celik, Greenwood (2014)

We estimate the model using the micro firm and patent data.

We find that reallocation of ideas increases productivity growthfrom

1.8% → 2%

Conclusions

Reallocation (of inputs and ideas) is a key driver of theproductivity growth.

General equilibrium effects might be vastly different than partialequilibrium.

It is important to preserve the micro structure while studyinggeneral equilibrium.

Very important to use micro data to discipline the right theory.

This is where OECD can be hugely helpful.

Conclusions

the impact of industrial policy on firm dynamics, factor reallocation, and aggregate productivity...

factor reallocationin

firmquality levelqsector

upquality levelqsector

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aggregate growthestimate

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