Firm Growth Through New Establishments

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See all articles by Dan Cao

Dan Cao

Georgetown University - Department of Economics

Henry R. Hyatt

U.S. Census Bureau - Center for Economic Studies

Toshihiko Mukoyama

Georgetown University - Department of Economics; CIREQ

Erick Sager

Federal Reserve Board

Date Written: Feburary 1st, 2017

Abstract

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

Suggested Citation

Cao, Dan and Hyatt, Henry R. and Mukoyama, Toshihiko and Sager, Erick, Firm Growth Through New Establishments (Feburary 1st, 2017). Available at SSRN: https://ssrn.com/abstract=

Dan Cao (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

Henry R. Hyatt

U.S. Census Bureau - Center for Economic Studies ( email )

4700 Silver Hill Road
Washington, DC 20233
United States

Toshihiko Mukoyama

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

CIREQ

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

Erick Sager

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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