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Reconciling the Firm Size and Innovation Puzzle
March 2016
Working Paper Number:
CES-16-20RR
There is a prevailing view in both the academic literature and the popular press that firms need to behave more entrepreneurially. This view is reinforced by a stylized fact in the innovation literature that R&D productivity decreases with size. However, there is a second stylized fact in the innovation literature that R&D investment increases with size. Taken together, these stylized facts create a puzzle of seemingly irrational behavior by large firms--they are increasing spending despite decreasing returns. This paper is an effort to resolve that puzzle. We propose and test two alternative resolutions: 1) that it arises from mismeasurement of R&D productivity, and 2) that firm size endogenously drives R&D strategy, and that the returns to R&D strategies depend on scale. We are able to resolve the puzzle under the first tack--using a recent measure of R&D productivity, RQ, we find that both R&D spending and R&D productivity increase with scale. We had less success with the second tack--while firm size affects R&D strategy in the manners expected by theory, there is no strategy whose returns decrease in scale. Taken together, our results are consistent with the Schumpeter view that large firms are the major engine of growth, they both spend more in aggregate than small firms, and are more productive with that spending. Moreover the prescription that firms should behave more entrepreneurially, should be treated with caution--one small firm strategy has lower returns to scale than its large firm counterpart.
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Outsourced R&D and GDP Growth
March 2016
Working Paper Number:
CES-16-19
Endogenous growth theory holds that growth should increase with R&D. However coarse comparison between R&D and US GDP growth over the past forty years indicates that inflation scientific labor increased 2.5 times, while GDP growth was at best stagnant. The leading explanation for the disconnect between theory and the empirical record is that R&D has gotten harder. I develop and test an alternative view that firms have become worse at it. I find no evidence R&D has gotten harder. Instead I find firms' R&D productivity declined 65%, and that the main culprit in the decline is outsourced R&D, which is unproductive for the funding firm. This offers hope firms' R&D productivity and economic growth may be fairly easily restored by bringing outsourced R&D back in-house.
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Asset Allocation in Bankruptcy
February 2016
Working Paper Number:
CES-16-13
This paper investigates the consequences of liquidation and reorganization on the allocation and subsequent utilization of assets in bankruptcy. We identify 129,000 bankrupt establishments and construct a novel dataset that tracks the occupancy, employment and wages paid at real estate assets over time. Using the random assignment of judges to bankruptcy cases as a natural experiment that forces some firms into liquidation, we find that even after accounting for reallocation, the long-run utilization of assets of liquidated firms is lower relative to assets of reorganized firms. These effects are concentrated in thin markets with few potential users, in areas with low access to finance, and in areas with low economic growth. The results highlight that different bankruptcy approaches affect asset allocation and utilization particularly when search frictions and financial frictions are present.
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Business Dynamics Statistics of High Tech Industries
January 2016
Working Paper Number:
CES-16-55
Modern market economies are characterized by the reallocation of resources from less productive, less valuable activities to more productive, more valuable ones. Businesses in the High Technology sector play a particularly important role in this reallocation by introducing new products and services that impact the entire economy. Tracking the performance of this sector is therefore of primary importance, especially in light of recent evidence that suggests a slowdown in business dynamism in High Tech industries. The Census Bureau produces the Business Dynamics Statistics (BDS), a suite of data products that track job creation, job destruction, startups, and exits by firm and establishment characteristics including sector, firm age, and firm size. In this paper we describe the methodologies used to produce a new extension to the BDS focused on businesses in High Technology industries.
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A Portrait of Firms that Invest in R&D
January 2016
Working Paper Number:
CES-16-41
We focus on the evolution and behavior of firms that invest in research and development (R&D). We build upon the cross-sectional analysis in Foster and Grim (2010) that identified the characteristics of top R&D spending firms and follow up by charting the behavior of these firms over time. Our focus is dynamic in nature as we merge micro-level cross-sectional data from the Survey of Industrial Research and Development (SIRD) and the Business Research & Development and Innovation Survey (BRDIS) with the Longitudinal Business Database (LBD). The result is a panel firm-level data set from 1992 to 2011 that tracks firms' performances as they enter and exit the R&D surveys. Using R&D expenditures to proxy R&D performance, we find the top R&D performing firms in the U.S. across all years to be large, old, multinational enterprises. However, we also find that the composition of R&D performing firms is gradually shifting more towards smaller domestic firms with expenditures being less sensitive to scale effects. We find a high degree of persistence for these firms over time. We chart the history of R&D performing firms and compare them to all firms in the economy and find substantial differences in terms of age, size, firm structure and international activity; these differences persist when looking at future firm outcomes.
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Research Funding and Regional Economies
January 2016
Working Paper Number:
CES-16-32
Public support of research typically relies on the notion that universities are engines of economic development, and that university research is a primary driver of high wage localized economic activity. Yet the evidence supporting that notion is based on aggregate descriptive data, rather than detailed links at the level of individual transactions. Here we use new micro-data from three countries - France, Spain and the United States - to examine one mechanism whereby such economic activity is generated, namely purchases from regional businesses. We show that grant funds are more likely to be expended at businesses physically closer to universities than at those farther away. In addition, if a vendor has been a supplier to a grant once, that vendor is subsequently more likely to be a vendor on the same or related grants. Firms behave in a way that is consistent with the notion that propinquity is good for business; if a firm supplies a research grant at a university in a given year it is more likely to open an establishment near that university in subsequent years than other firms.
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Cogeneration Technology Adoption in the U.S.
January 2016
Working Paper Number:
CES-16-30
Well over half of all electricity generated in recent years in Denmark is through cogeneration. In U.S., however, this number is only roughly eight percent. While both the federal and state governments provided regulatory incentives for more cogeneration adoption, the capacity added in the past five years have been the lowest since late 1970s. My goal is to first understand what are and their relative importance of the factors that drive cogeneration technology adoption, with an emphasis on estimating the elasticity of adoption with respect to relative energy input prices and regulatory factors. Very preliminary results show that with a 1 cent increase in purchased electricity price from 6 cents (roughly current average) to 7 cents per kwh, the likelihood of cogeneration technology adoption goes up by about 0.7-1 percent. Then I will try to address the general equilibrium effect of cogeneration adoption in the electricity generation sector as a whole and potentially estimate some key parameters that the social planner would need to determine the optimal cogeneration investment amount. Partial equilibrium setting does not consider the decrease in investment in the utilities sector when facing competition from the distributed electricity generators, and therefore ignore the effects from the change in equilibrium price of electricity. The competitive market equilibrium setting does not consider the externality in the reduction of CO2 emissions, and leads to socially sub-optimal investment in cogeneration. If we were to achieve the national goal to increase cogeneration capacity half of the current capacity by 2020, the US Department of Energy (DOE) estimated an annual reduction of 150 million metric tons of CO2 annually ' equivalent to the emissions from over 25 million cars. This is about five times the annual carbon reduction from deregulation and consolidation in the US nuclear power industry (Davis, Wolfram 2012). Although the DOE estimates could be an overly optimistic estimate, it nonetheless suggests the large potential in the adoption of cogeneration technology.
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The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity
January 2016
Working Paper Number:
CES-16-26
Using a difference-in-difference methodology, we find that the state-level deregulation of local U.S. banking markets leads to significant increases in the reallocation of labor within local industries towards small firms with higher marginal products of labor. Using plant-level data, we propose and examine an approach that quantifies the industry productivity gains from labor reallocation and find that these gains are economically important. Our analysis suggests that labor reallocation is a significant channel through which local banking markets affect the aggregate productivity and performance of local industries.
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Wealth, Tastes, and Entrepreneurial Choice
October 2015
Working Paper Number:
CES-15-34
The nonpecuniary benefits of managing a small business are a first order consideration for many nascent entrepreneurs, yet the preference for business ownership is mostly ignored in models of entrepreneurship and occupational choice. In this paper, we study a population with varying entrepreneurial tastes and wealth in a simple general equilibrium model of occupational choice. This choice yields several important results: (1) entrepreneurship can be thought of as a normal good, generating wealth effects independent of any financing constraints; (2) nonpecuniary entrepreneurs select into small-scale firms; and (3) subsidies designed to stimulate more business entry can have regressive distributional effects. Despite abstracting from other important considerations such as risk, financing constraints, and innovation, we show that nonpecuniary compensation is particularly relevant in discussions of small businesses.
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Collateral Values and Corporate Employment
September 2015
Working Paper Number:
CES-15-30R
We examine the impact of real estate collateral values on corporate employment. Our empirical strategy exploits regional variation in local real estate price growth, firm-level data on real estate holdings, as well as establishment-level data on employment and the location of firms' operations from the U.S. Census Bureau. Over the period from 1993 until 2006, we show that a typical U.S. publicly-traded firm increases employment expenditures by $0.10 per $1 increase in collateral. We show this additional hiring is funded through debt issues and the effects are stronger for firms likely to be financially constrained. These firms increase employment at establishments outside of their core industry focus and away from the location of real estate holdings, leading to regional spillover effects. We document how shocks to collateral values influence labor allocation within firms and how these effects show up in the aggregate.
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