Research projects (co)funded by the Slovenian Research Agency.
Project
Member of University of Ljubljana
School of Economics and Business
Code
N5-0097
Project
Understanding the weak relationship between firm size and productivity
Period
1. 1. 2019 – 31. 12. 2022
Range on year
1,32 FTE
Head
Research activity
Social sciences/Economics
Research organisation
/
Abstract
The standard economic framework predicts a positive relationship between size and productivity. If firms can pay a fixed cost to export or enter a new product market, this relationship will be even stronger. Most empirical studies, however, find only a small productivity premium for larger firms. This could be due to misallocation of resources, an active area of research, but other explanations are possible. Either the theory misses an important element, or productivity is measured imperfectly.
First, we study the size-productivity relationship theoretically. Several widely-used models of trade feature discrete jumps in output when firms enter new markets. We derive analytic expressions for the “expected” elasticity of size with respect to productivity. We show this elasticity can be lowered if a 2nd source of heterogeneity is added, firm-specific fixed costs of market entry or demand variation (which can be interpreted as quality).
Our model can accommodate a wide range of size-productivity relationships, which we estimate using data for three countries. Each country's dataset has specific advantages. The Chinese firm sample is particularly large and allows estimation by industry. For Belgium, we observe sourcing of intermediates and R&D services, which we use to control for quality differences. For Slovenia, we observe the occupational structure of each firm's workforce, which we use to measure fixed costs and improve productivity measurement.
Researchers
The phases of the project and their realization
Work plan: work packages and timetable
Theory
WP1:
Calculate the expected elasticity of firm size with respect to productivity for international trade models with 1 dimension of firm heterogeneity.
WP2:
Calculate the expected elasticity of firm size with respect to productivity for international trade models with 2 dimensions of firm heterogeneity (productivity & demand/FC)
WP3:
Eliminate the second dimension of heterogeneity by interpreting them as endogenously chosen product quality. Characterize (through comparative statics & simulation) the expected elasticity.
Empirics
Data preparation:
: Estimate firm-level productivity and three measures of firm size in the firm-level data for all three countries
WP4:
- Estimate the size-productivity relationship (for all three countries), allowing the slope to depend on observable elements in the theory (market entry, etc.)
- China: Allow the elasticity to vary by industry, as predicted by variable demand elasticities
WP5:
Belgium: Control for product quality when estimating the size-productivity relationship
WP6:
- Slovenia: Verify whether proxies for fixed costs are invariant to size or productivity when market entry is controlled for.
- Improve productivity estimation by eliminating fixed factors from input factor measures
