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Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship
December 2007
Working Paper Number:
CES-07-33
We study how US branch-banking deregulations affected the entry and exit of firms in the non-financial sector using establishment-level data from the US Census Bureau's Longitudinal Business Database. The comprehensive micro-data allow us to study how the entry rate, the distribution of entry sizes, and survival rates for firms responded to changes in banking competition. We also distinguish the relative effect of the policy reforms on the entry of startups versus facility expansions by existing firms. We find that the deregulations reduced financing constraints, particularly among small startups, and improved ex ante allocative efficiency across the entire firm-size distribution. However, the US deregulations also led to a dramatic increase in 'churning' at the lower end of the size distribution, where new startups fail within the first three years following entry. This churning emphasizes a new mechanism through which financial sector reforms impact product markets. It is not exclusively better ex ante allocation of capital to qualified projects that causes creative destruction; rather banking deregulations can also 'democratize' entry by allowing many more startups to be founded. The vast majority of these new entrants fail along the way, but a few survive ex post to displace incumbents.
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The Adoption and Diffusion of Organizational Innovation: Evidence for the U.S. Economy
June 2007
Working Paper Number:
CES-07-18
Using a unique longitudinal representative survey of both manufacturing and nonmanufacturing businesses in the United States during the 1990's, I examine the incidence and intensity of organizational innovation and the factors associated with investments in organizational innovation. Past profits tend to be positively associated with organizational innovation. Employers with a more external focus and broader networks to learn about best practices (as proxied by exports, benchmarking, and being part of a multi-establishment firm) are more likely to invest in organizational innovation. Investments in human capital, information technology, R&D, and physical capital appear to be complementary with investments in organizational innovation. In addition, nonunionized manufacturing plants are more likely to have invested more broadly and intensely in organizational innovation.
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A General Inter-Industry Relatedness Index
December 2006
Working Paper Number:
CES-06-31
Firm growth and expansion is widely believed to be guided by the desire to leverage existing resources. But which resources? The answer depends largely on context.the peculiarities of industries, firms, technologies, production, customers, and a host of other dimensions. This fact makes pointing to any particular set of resources as the source of expansion decisions potentially problematic and makes more difficult tests of theories such as the resource-based view of the firm. This paper tackles the problem by developing a general inter-industry relatedness index that can be usefully applied across industry and firm contexts. The index harnesses the relatedness information embedded in the multi-product organization and diversification decisions of every firm in the US manufacturing economy. The index is general in that it implicitly varies the underlying resources upon which expansion proceeds with the industries in question and provides a percentile relatedness rank for every possible pair of fourdigit SIC manufacturing industries. The general index is tested for predictive validity and found to perform as expected. Applications of the index in strategy research are suggested.
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Industry Learning Environments and the Heterogeneity of Firm Performance
December 2006
Working Paper Number:
CES-06-29
This paper characterizes inter-industry heterogeneity in rates of learning-by-doing and examines how industry learning rates are connected with firm performance. Using data from the Census Bureau and Compustat, we measure the industry learning rate as the coefficient on cumulative output in a production function. We find that learning rates vary considerably among industries and are higher in industries with greater R&D, advertising, and capital intensity. More importantly, we find that higher rates of learning are associated with wider dispersion of Tobin's q and profitability among firms in the industry. Together, these findings suggest that learning intensity represents an important characteristic of the industry environment.
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The Industry R&D Survey: Patent Database Link Project
November 2006
Working Paper Number:
CES-06-28
This paper details the construction of a firm-year panel dataset combining the NBER Patent Dataset with the Industry R&D Survey conducted by the Census Bureau and National Science Foundation. The developed platform offers an unprecedented view of the R&D-to-patenting innovation process and a close analysis of the strengths and limitations of the Industry R&D Survey. The files are linked through a name-matching algorithm customized for uniting the firm names to which patents are assigned with the firm names in Census Bureau's SSEL business registry. Through the Census Bureau's file structure, this R&D platform can be linked to the operating performances of each firm's establishments, further facilitating innovation-to-productivity studies.
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Residual Claims and Incentives in Restaurant Chains
July 2006
Working Paper Number:
CES-06-18
I examine the relationship between ownership and production activities using a new dataset of restaurant chains. Production in restaurant chains provides an opportunity to examine the effects of residual claims on incentives because production is decentralized and fairly uniform across restaurants in the same chain. Yet the allocation of residual claims varies between company-owned and franchised units, affecting the strength of incentives for restaurantlevel activities. The decision to own or franchise each restaurant reflects the value of either withholding or allocating residual claims for performing these activities. I find that more complex production activities are systematically correlated with company ownership. Onsite food production raises the likelihood of company ownership by 28% relative to offsite food production. Table service raises the likelihood of company ownership by 26% relative to counter service. The results are not consistent with straightforward effort-promoting effects of residual claims in simple principal agent models. They are consistent with the view that residual claims can generate unbalanced incentives across diverse tasks.
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Volatility and Dispersion in Business Growth Rates: Publicly Traded Versus Privately Held Firms
July 2006
Working Paper Number:
CES-06-17
We study the variability of business growth rates in the U.S. private sector from 1976 onwards. To carry out our study, we exploit the recently developed Longitudinal Business Database (LBD), which contains annual observations on employment and payroll for all U.S. businesses. Our central finding is a large secular decline in the cross sectional dispersion of firm growth rates and in the average magnitude of firm level volatility. Measured the same way as in other recent research, the employment-weighted mean volatility of firm growth rates has declined by more than 40% since 1982. This result stands in sharp contrast to previous findings of rising volatility for publicly traded firms in COMPUSTAT data. We confirm the rise in volatility among publicly traded firms using the LBD, but we show that its impact is overwhelmed by declining volatility among privately held firms. This pattern holds in every major industry group. Employment shifts toward older businesses account for 27 percent or more of the volatility decline among privately held firms. Simple cohort effects that capture higher volatility among more recently listed firms account for most of the volatility rise among publicly traded firms.
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Where Do Manufacturing Firms Locate Their Headquarters?
October 2005
Working Paper Number:
CES-05-17
Firms' headquarters [HQ] support their production activity, by gathering information and outsourcing business services, as well as, managing, evaluating, and coordinating internal firm activities. In search of locations for these functions, firms often separate the HQ function physically from their production facilities and construct stand-alone HQs. By locating its HQ in a large, service oriented metro area away from its production facilities, a firm may be better able to out-source service functions in that local metro market and also to gather information about market conditions for their products. However if the firm locates the HQ away from its production activity, that increases the coordination costs in managing plant activities. In this paper we empirically analyze the trade-off of these two considerations.
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Computer Investment, Computer Networks and Productivity
January 2005
Working Paper Number:
CES-05-01
Researchers in a large empirical literature find significant relationships between computers and labor productivity, but the estimated size of that relationship varies considerably. In this paper, we estimate the relationships among computers, computer networks, and plant-level productivity in U.S. manufacturing. Using new data on computer investment, we develop a sample with the best proxies for computer and total capital that the data allow us to construct. We find that computer networks and computer inputs have separate, positive, and significant relationships with U.S. manufacturing plant-level productivity. Keywords: computer input; information technology; labor productivity
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The Geographic Concentration of New Firm Formation and Human Capital: Evidence from the Cities
February 2003
Working Paper Number:
CES-03-05
The role of education and human capital externalities is a key variable in theories of economic growth. However, the mechanism by which these externalities are realized has not been fully investigated. We examine the relationship between area differences in the levels of human capital and subsequent differences in new firm start-up rates. Firm start-ups are usually based on an innovation (in product, process, or market) that derives from utilization of new knowledge. We find that the new firm start-up rates in areas that function as integrated labor and consumer markets (city plus surrounding commuter area) are (1) positively related to the share of adults with college degrees, and also (2) positively related to higher levels of existing establishments in the same industry and area sector. The finding that higher concentrations of existing establishments in the same industry segment were strongly associated with higher startup rates suggests that spillover of relevant knowledge from other local business owners/managers and researchers within each industry contributes to greater innovation and growth in the area.
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