Firm Growth Through New Establishments
63 Pages Posted:
Date Written: Feburary 1st, 2017
This paper analyzes the distribution of firms and firm-level employment growth along two margins: the extensive margin (the number of establishments in a firm) and the intensive margin (the number of workers per establishment in a firm). We utilize administrative datasets to document the behavior of these two margins in relation to changes in the U.S. firm size distribution. In the cross-section, we find that the distribution of establishment number per firm has a fat tail, similar to the distribution of firm sizes and to some extent the distribution of establishment sizes, as documented in the literature. Over time the significant increase in average firm size between 1990 and 2015 was driven primarily by an expansion along the extensive margin, particularly in very large firms. We develop a tractable general equilibrium growth model with two types of innovations: external and internal. External innovation leads to the extensive margin of firm growth and internal innovation leads to the intensive margin growth. The model generates the three fat-tailed distributions (establishment numbers, firm sizes, and establishment sizes) as observed in our data. We also estimate the model to uncover the fundamental forces that have caused the changes from 1990 to 2015. Through the lens of our model, we find that the external innovation cost became lower for the firms that are actively expanding with new establishments, whereas the internal innovation cost became higher. Entry became more costly whereas the average quality at entry has improved. Firm growth by external innovation upon entry has become more common but it is now shorter-lived.
Keywords: firm growth, firm size distribution, establishment, innovation
JEL Classification: E24, J21, L11, O31
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