The Impact of Industrial Policy on Firm Dynamics, Factor Reallocation, and Aggregate Productivity Growth, Ufuk Akcigit

The Impact of Industrial Policy on
Firm Dynamics, Factor Reallocation, and
Aggregate Productivity Growth
Ufuk Akcigit
University of Pennsylvania & NBER
OECD - September 26, 2014
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 1

Background
Understanding the aggregate implications of growth & industrial
policies requires a good understanding of micro players of the
macroeconomic system.
Reaction of macroeconomy to policy is a system-wide response.
The question is: How do we go from partial equilibrum to
system-wide responses?
This is where going from micro-to-macro becomes crucial.
Many policies that we think will be good in partial equilibrium
might have totally different general equilibrium impacts:
Aggregate price effect
Competition effect
Composition/Reallocation effect

What is Our Research Approach?
Start with empirical regularities in the micro data
Motivated by those regularities, construct a general equilibrium
theory of firm dynamics and aggregate growth
Estimate the structural parameters of the model using micro-level
data
Conduct counterfactual policy experiments
Incumbent R&D subsidy
Entry subsidy
Subsidy to incumbent fixed operation cost

Today’s Roadmap
1 Factor reallocation in developed countries
2 Factor reallocation in developing countries
3 Reallocation of ideas

SECTION 1:
FACTOR REALLOCATION
IN DEVELOPED COUNTRIES

The Model Economy
quality level
q
sector j
0 1
US Economy

The Model Economy
quality level
q
sector j
0 1
GDP = Sectors combined

Sector-specific Productivities
quality level
q
sector j
0 1

Example of a Firm
quality level
q
sector j
0 1

Example of another Firm
quality level
q
sector j
0 1

Productivity Growth: Internal R&D
quality level
q
internal R&D
sector j
0 1

Productivity Growth: External R&D
quality level
q
sector j
0 1
External R&D

Reallocation is Taking Place...
quality level
q
sector j
0 1
External R&D

Competition Creates Selection
quality level
q
sector j
0 1
External R&D

Eventually Some Firms Exit
quality level
q
sector j
0 1
External R&D
Exit

In the Meantime...
quality level
q
sector j
0 1

Some New Entrants Show Up
quality level
q
sector j
0 1
new entrants

And New Entrants Replace Incumbents
quality level
q
sector j
0 1

General Equilibrium Effects of an Entry Subsidy
Competition effect

Competition effect
R&D Input prices, wages/salaries, will increase.

Competition effect


Competition effect
Entrepreneurial talent is heterogeneous.

Competition effect
Some are good entrepreneurs and some are bad:

Competition effect
Some are good entrepreneurs and some are bad:
VS

Acemoglu, Akcigit, Bloom, Kerr (2013)
We estimate this model using US firms.
Data: Census of Manufacturing
Method: Simulated Method of Moments

depiction (except for moments 20 and 21, which are not shown in these …gures).
Table 2. Moment Matching
# Moments Model Data # Moments Model Data
1. Firm Exit (small) 0.086 0.093 12. Sales Growth (small) 0.115 0.051
2. Firm Exit (large) 0.060 0.041 13. Sales Growth (large) -0.004 0.013
3. Firm Exit (young) 0.078 0.102 14. Sales Growth (young) 0.070 0.071
4. Firm Exit (old) 0.068 0.050 15. Sales Growth (old) 0.030 0.014
5. Trans. from large to small 0.024 0.008 16. R&D to Sales (small) 0.097 0.099
6. Trans. from small to large 0.019 0.019 17. R&D to Sales (large) 0.047 0.042
7. Prob. of small (cond on entry) 0.539 0.715 18. R&D to Sales (young) 0.083 0.100
8. Emp. Growth (small) 0.063 0.051 19. R&D to Sales (old) 0.061 0.055
9. Emp. Growth (large) -0.007 0.013 20. 5-year Entrant Share 0.363 0.393
10. Emp. Growth (young) 0.040 0.070 21. Aggregate growth 0.022 0.022
11. Emp. Growth (old) 0.010 0.015
We estimate this model using US firms.
Data: Census of Manufacturing
Method: Simulated Methods of Moments
Figure 2A: Transition Rates Figure 2B: R&D Intensity
Figure 2C: Sales Growth Figure 2D: Employment Growth
Our estimation procedure generates a relatively good …t for all of the moments. In particular, for

Findings:
Subsidy to incumbent R&D is not boosting growth.

Findings:
Subsidy to entry is not boosting growth.

Findings:
Subsidy to entry is not boosting growth.
Taxing incumbent’s fixed operations increases growth by
exploiting the selection/reallocation margins.

SECTION 2:
FACTOR REALLOCATION
IN DEVELOPING COUNTRIES

Firm Dynamics in Developing Countries
hi
Graph from Hsieh and Klenow (2014).

Figure1:PlantEmploymentbyAgeintheCrossSection
US
Mexico
India
8
4
2
1
1/2
Employment (Age 5=1)
5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 =40
Age
Sources:19941995ASINSS(India),2003EconomicCensus(Mexico),and2002ManufacturingCensus(U.S.).
Graph from Hsieh and Klenow (2014).
Ufuk Akcigit (UPenn NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 25

Why does reallocation among firms not taking place in India?

Credit constraints?

Credit constraints?
Size-dependent Policies?

Credit constraints?
Size-dependent Policies?
An interesting fact: The best predictor of firm size in India is....

FAMILY SIZE!

MAJOR OBSTACLE TO FIRM GROWTH:
LACK OF DELEGATION

V(n)
Vself(n)
0 # of product lines, n

Page WE Value Function as Contracts (m) Improve
NEED TO ADD CONTRACTUAL FRICTIONS ON TOP OF THE
BASELINE FIRM DYNAMICS FRAMEWORK.

Value Function as Contracts (m) Improve
V(n)
0 n*
# of product lines, n
Vself(n)
Vmanager(n)

Value Function as Contracts (m) Improve
V(n)
0 n*
# of product lines, n
Vself(n)
Vmanager(n)
Remark: Delegation is crucial for fighting decreasing returns.

Akcigit, Alp, Peters (2014)
Introduce contractual frictions between owners and managers.

Estimate the model using data on Indian economy.

Findings:

Findings:
Lack of delegation can account for 50% of the observed
differences in factor reallocation in the US vs in India.

Findings:
Lack of delegation can account for 50% of the observed
differences in factor reallocation in the US vs in India.
Industrial policies, such as increased entry or small business
subsidies, are very ineffective in generating growth due to
obstacles in delegation.

SECTION 3:
REALLOCATION OF IDEAS

Safety Pin

Walter Hunt (1796-1859)

USPTO Patent Number 6281

25
20
15
10
5
0
Fraction of Patents Sold
domestic only all
1975 1980 1985 1990 1995 2000
grant year
in % terms

Patent Sale Duration
Average = 5.5 years
.12
.1
.08
.06
.04
.02
0
Frequency
in number of years
0 4 8 12 16
duration

Empirical FactsWe Document
1 Real sales and market value are negatively correlated with the
distance between a firm and its patents.
2 Patents which are more distant are more likely to be sold.
3 After a patent resale, the distance between a patent and its owner
decreases.

Search-theoretic Model
ݖᇱ ൌ ݖ ൅ γݔࢠ, ܽܭ ݖ′, ݏ
ݖ, ܸܽ ݖ, ݏ
ݖᇱ ൌ ݖ ൅ γݔࢠ,
pay P(x,z),
ܤ ݖ, ݏ
sell
ݖ, ܸ ݖ, ݏ
ݖ, earn q,
ܸ ݖ, ݏ +q
ݖ
innovate
don’t
innovate
keep
try to sell
don’t meet
meet
݉௕ሺ݊௔/݊௕ሻ
i
1 ‐ i
1 െ ݉௕ሺ݊௔/݊௕ሻ
ߪ
1 െ ߪ
patent expires
buy
1 െ ݔ௔
ݔ௔
don’t buy ݖ, ܸ ݖ, ݏ

Akcigit, Celik, Greenwood (2014)
We estimate the model using the micro firm and patent data.
We find that reallocation of ideas increases productivity growth
from
1.8% ! 2%

Conclusions
Reallocation (of inputs and ideas) is a key driver of the
productivity growth.

Conclusions
General equilibrium effects might be vastly different than partial
equilibrium.

Conclusions
equilibrium.
It is important to preserve the micro structure while studying
general equilibrium.

Conclusions
equilibrium.
Very important to use micro data to discipline the right theory.

Conclusions
equilibrium.
Very important to use micro data to discipline the right theory.
This is where OECD can be hugely helpful.

The Impact of Industrial Policy on Firm Dynamics, Factor Reallocation, and Aggregate Productivity Growth, Ufuk Akcigit

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