firm dynamics in developing countries - world...

Firm Dynamics in Developing Countries1

Ufuk Akcigit

University of Chicago & NBER

Conference on Economic Growth - July 10, 2015

1Based on a joint work with Harun Alp (UPenn) and Michael Peters (Yale)Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 1

Background

Understanding the growth process requires agood understanding of micro players (firms &entrepreneurs) of the macroeconomy.

Going from micro-to-macro is crucial.

The back-and-forth dialogue between data andtheory is important.

Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 2

What is Our Research Approach?

Start with empirical regularities in the micro data.

Motivated by those regularities, construct ageneral equilibrium theory of firm dynamics andaggregate growth.

Estimate the structural parameters of the modelusing micro-level data.

Conduct counterfactual experiments.


Motivation

Recent literature: Firm dynamics in poor countriesshow striking differences to those of rich countries


Hsieh and Klenow (2014)

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

US

Mexico

India

1/2

1

2

4

8

Empl

oym

ent (

Age

< 5=

1)

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

Age

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


The expanding firms in India

While the average life-cycle is flat, some Indianfirms manage to grow:

Age<5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 40>

Mea

n E

mpl

oym

ent

1

1.5

2

2.5

3

3.5

Mean95% Confidence Interval

ASI vs NSS Family Firms


The stagnant firms in India Extra

... but aggregate importance of tiny producersstays stubbornly high

Age0-5 6-10 11-15 16-20 21-25 26+

Sha

re o

f Est

ablis

hmen

ts

0

0.2

0.4

0.6

0.8

1

India


Selection in the US vs India

Many small firms exist in the US as well....

... but they do not matter as much and exit quickly


Selection in the US vs India

SHARE OF SMALL ESTABLISHMENTS (COUNT)

Age0-5 6-10 11-15 16-20 21-25 26+

Sha

re o

f Est

ablis

hmen

ts

0

0.2

0.4

0.6

0.8

1

1.2

IndiaUS


Motivation: Entrepreneurial Selection

There are two types of entrepreneurs in the data:Schoar (2010), Hurst and Pugsley (2012), Decker, Haltiwanger,Jarmin and Miranda (2014)

Subsistence entrepreneurs:No intention to growWant to keep the business within the family.

Transformative entrepreneurs:Create businesses with the intention to innovate and growCreate employment for other workers and value added for theeconomy.


Firm Dynamics in Developing Countries

Why are transformative entrepreneurs notgrowing in India?




Credit constraints?


Firm Dynamics in Developing CountriesFigure 3: Average Product and Firm Size

Note: Figure shows local linear regressions of log average product on log employment. We subtract the mean of the fitted value at log(employment)=4. Dashed lines represent 95 percent confidence bounds.

value-added/capital value-added/worker gross output/ intermediate inputs

0.3.6.9

1.21.51.8

1 2 3 4 5 6

0.51

1.52

2.53

1 2 3 4 5 6

-.2

-.1

0

.1

.2

1 2 3 4 5 6

India (2011)

0.51

1.52

2.53

1 2 3 4 5 6

-.2

-.1

0

.1

.2

1 2 3 4 5 6

Indonesia (2006)

0.3.6.9

1.21.51.8

1 2 3 4 5 6

0.51

1.52

2.53

1 2 3 4 5 6

-.2

-.1

0

.1

.2

1 2 3 4 5 6

Mexico (2008)

Log

Rat

io

Log Employment

Figure 3: Average Product and Firm Size

Note: Figure shows local linear regressions of log average product on log employment. We subtract the mean of the fitted value at log(employment)=4. Dashed lines represent 95 percent confidence bounds.

value-added/capital value-added/worker gross output/ intermediate inputs

0.3.6.9

1.21.51.8

1 2 3 4 5 6

0.51

1.52

2.53

1 2 3 4 5 6

-.2

-.1

0

.1

.2

1 2 3 4 5 6

India (2011)

0.51

1.52

2.53

1 2 3 4 5 6

-.2

-.1

0

.1

.2

1 2 3 4 5 6

Indonesia (2006)

0.3.6.9

1.21.51.8

1 2 3 4 5 6

0.51

1.52

2.53

1 2 3 4 5 6

-.2

-.1

0

.1

.2

1 2 3 4 5 6

Mexico (2008)

Log

Rat

io

Log Employment

DATA SOURCE: HSIEH AND OLKEN (2014)




Credit constraints?




Credit constraints?

Size-dependent Policies?



Labor market regulations at 100 employees.

020

4060

8010

0

0 50 100 150 200Employment

0 < Employment < 200

020

4060

80

0 50 100 150 200Employment


1020

3040

0 50 100 150 200Employment


05

1015

20

50 100 150 200Employment


DATA SOURCE: AKCIGIT, ALP, PETERS (2014)




Credit constraints?





Credit constraints?


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

vs.



FAMILY SIZE!



MAJOR OBSTACLE TO FIRM GROWTH:LACK OF DELEGATION


Stylized Facts from Bloom & Van Reenen et al.’s Work

Micro-evidence: Limits to managerial delegationimportant for firm performance in developingcountries

- Outside managers misappropriate assets due to weakrule of law.

- Span of control of the owner is a binding constraint indeveloping countries.

- Family size is one of the best predictors of firm size inIndia.

Implication: Limits on managerial time reduce competitionso that unproductive firms survive (lack of selection).

SDP CC


Lack of Delegation is a Major Problem Page 1 of 1

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


This paper

Research Question:How much of the observed differences across

countries can be explained by the lack to delegation?


MODEL


The Model Economy

0 1

quality level

q

sector j

US Economy


The Model Economy

0 1

quality level

q

sector j

GDP = Sectors combined


Sector-specific Productivities

0 1

quality level

q

sector j


Example of a Firm

0 1

quality level q

sector j


Example of another Firm

0 1

quality level q

sector j


Productivity Growth: External R&D

0 1

quality level q

sector j

External R&D


Reallocation is Taking Place...

0 1

quality level q

sector j

External R&D


Competition Creates Selection

0 1

quality level q

sector j

External R&D


Eventually Some Firms Exit

0 1

quality level q

sector j

External R&D

Exit


In the Meantime...

0 1

quality level q

sector j


Some New Entrants Show Up

0 1

quality level q

sector j

new entrants


And New Entrants Replace Incumbents

0 1

quality level q

sector j


Model Details

Production requires managerial time.


Model Details

Production requires managerial time.The owner can run the company by herself.

But she has limited amount of time and therefore runs intospan of control problem.


Model Details

0 # of product lines, n

V(n)

Vself(n)


Model Details



Or the owner can decide to hire outside managers.


Model Details



Or the owner can decide to hire outside managers.Managers might steal. Owner has to monitor.


Model Details



Or the owner can decide to hire outside managers.Managers might steal. Owner has to monitor.Then the net benefit is

ξc = manager′s human capital − monitoring time

ξc: Country-specific delegation benefit.


Value Function as delegation (ξ) gets easier


V(n)

Vself(n)



0

# of product lines, n

V(n)

n*(ξL)

Vself(n)

Vmanager(n)



0

# of product lines, n

V(n)

n*(ξL)

Vself(n)

Vmanager(n)

Remark: Delegation is crucial to fight decreasing returns.




V(n)

n*(ξL)

Vself(n)

Vmanager(n)

n*(ξH)

Remark: Delegation is crucial to fight decreasing returns.


Implications

1 Small firms do not hire outside managers.

2 Entrepreneurs with larger time endowments(larger families) are less likely to hire managers.

3 In better contractual environments (stronger ruleof law), firms are more likely to hire managers.

4 The correlation between firm size and family sizeis weaker when the contractual environment isstronger.

5 Firm growth and size relationship is negative,more so when the rule of law gets weaker.


Implications

1 Small firms do not hire outside managers.2 Entrepreneurs with larger time endowments

(larger families) are less likely to hire managers.

3 In better contractual environments (stronger ruleof law), firms are more likely to hire managers.




Implications


(larger families) are less likely to hire managers.3 In better contractual environments (stronger rule

of law), firms are more likely to hire managers.




Implications


(larger families) are less likely to hire managers.3 In better contractual environments (stronger rule

of law), firms are more likely to hire managers.4 The correlation between firm size and family size

is weaker when the contractual environment isstronger.



Qualitative Evidence



0.1

.2.3

.4(Manager>0)

-.5 0 .5 1 1.5Employment

Prediction: Small firms are less likely to hire outside managers.



-.02

-.01

0.0

1.0

2(M

anag

er>0

)

-2 -1.5 -1 -.5 0 .5 1 1.5Family Size

Prediction: Entrepreneurs with larger families are less likely to hire managers.



-.005

0.005

.01

.015

.02

(Manager>0)

-.2 -.15 -.1 -.05 0 .05 .1 .15Trust

Prediction: In better contractual environments, firms are more likely to hiremanagers.



-1.5

-1-.5

0.5

Empl

oym

ent

-2 -1.5 -1 -.5 0 .5 1 1.5Family Size

High-trust region Low-trust region

Prediction: The correlation between firm size and family size is weaker whenthe contractual environment is stronger.



-2-1

01

2G

row

th o

f Em

ploy

men

t

0 2 4 6 8Employment

Low-trust region High-trust region

Prediction: Firm growth and size relationship is negative, more so when therule of law gets weaker.


Role of Delegation

How important is the lack of delegationquantitatively?

How would have the Indian firms behaved if theyfaced US-level of delegation benefit?

Estimate the parameters of the model, especiallyξus and ξindia, using firm-level data from India andthe US.


Calibration

Parameter India Value US Valueξ benefit of delegation 0.02 0.41α share of high type 0.03 0.22

Table: PARAMETER CALIBRATION FOR INDIAN FIRMS


Implications for the life-cycleFigure: LIFE CYCLE OF US FIRMS

Age0-5 6-10 11-15 16-20 21-25 +26

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5DataModel


Implications for the life-cycleFigure: LIFE CYCLE OF INDIAN FIRMS

Age0-5 6-10 11-15 16-20 21-25 +26

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1.5

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5DataModel


Selection in India (1)Figure: SHARE OF SMALL FIRMS, DATA & MODEL

Age0-5 6-10 11-15 16-20 21-25 26+

Sha

re o

f Sm

all F

irms

0.2

0.4

0.6

0.8

1

India - DataIndia - ModelUS - DataUS - Model


Selection in India (2)

Figure: SHARE OF HIGH-TYPE FIRMS IN INDIA (MODEL)

Age0-1 2-3 4-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40

Sha

re o

f Hig

h-T

ype

Firm

s

0

0.2

0.4

0.6

0.8

1India




Age0-1 2-3 4-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40

Sha

re o

f Hig

h-T

ype

Firm

s

0

0.2

0.4

0.6

0.8

1IndiaUS




Age0-1 2-3 4-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40

Sha

re o

f Hig

h-T

ype

Firm

s

0

0.2

0.4

0.6

0.8

1IndiaUSUS w/ India ,


Isolating the Importance of Delegation

How much of this difference comes from ξUS vsξIND?

1 Give ξUS to the Indian firms,

2 Give ξIND to the US firms.


Indian Firms with ξUS

Figure: LIFE CYCLE IN INDIA, US AND INDIA WITH ξUS (MODEL)

Age0-5 6-10 11-15 16-20 21-25 +26

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1.5

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5IndiaUS




Age0-5 6-10 11-15 16-20 21-25 +26

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5IndiaUSIndia w/ US 9




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2

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3.5

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4.5

5IndiaUSIndia w/ US �

Closes the gap, on average, by 50%!


US Firms with ξIND

Figure: LIFE CYCLE IN INDIA, US AND US WITH ξIND (MODEL)

Age0-5 6-10 11-15 16-20 21-25 +26

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1

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5IndiaUS


US Firms with ξIND


Age0-5 6-10 11-15 16-20 21-25 +26

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5IndiaUSUS w/ India 9


US Firms with ξIND


Age0-5 6-10 11-15 16-20 21-25 +26

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1.5

2

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5IndiaUSUS w/ India �


Decomposing Delegation Benefits ξ

Try to decompose delegation benefit ξ into:

rule of lawhuman capitalfinancial development

Accounting exercise usingξc = β0 + β1 × ROLc + β2 ×HCc + β3 × FinDevc + φ× ln(y) + εc



Try to decompose delegation benefit ξ into:rule of law

human capitalfinancial development




Try to decompose delegation benefit ξ into:rule of lawhuman capital

financial development




Try to decompose delegation benefit ξ into:rule of lawhuman capitalfinancial development



Decomposing the US life-cycle

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4US(Fitted 9)US w/ India Fitted 9

Institution-Age 6-10 11-15 16-20 21-25 26+Rule of Law 30% 31% 29% 28% 27%Human Capital 40% 38% 41% 38% 38%Financial Development 15% 14% 15% 17% 16%Rest 15% 17% 15% 17% 19%



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4US(Fitted 9)US w/ India Fitted 9US w/ India ROL




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4US(Fitted 9)US w/ India Fitted 9US w/ India ROLUS w/ India ROL + HC




Age0-5 6-10 11-15 16-20 21-25 +26

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4US(Fitted 9)US w/ India Fitted 9US w/ India ROLUS w/ India ROL + HCUS w/ India ROL + HC + PC



Conclusions

Firm selection and factor reallocation are key foreconomic growth yet they don’t happen indeveloping countries.Not everybody is destined to be a goodentrepreneur. (Right allocation of microcredits?)Credit constraints and size-dependent distortionsare (I am sure) important. Yet there is somethingelse that is fundamentally missing in developingcountries.Tranformative entrepreneurs need a goodplayground with strong rule of law and trust.


firm dynamics in developing countries - world...

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