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The Impact of Industrial Policy on
Firm Dynamics, Factor Reallocation, and
Aggregate Productivity Growth
Ufuk Akcigit
University of Pennsylvania & NBER
OECD - September 26, 2014
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Background
Understanding the aggregate implications of growth & industrialpolicies requires a good understanding of micro players of themacroeconomic system.
Reaction of macroeconomy to policy is a system-wide response.
The question is: How do we go from partial equilibrum tosystem-wide responses?
This is where going from micro-to-macro becomes crucial.
Many policies that we think will be good in partial equilibriummight have totally different general equilibrium impacts:
Aggregate price effectCompetition effectComposition/Reallocation effect
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What is Our Research Approach?
Start with empirical regularities in the micro data
Motivated by those regularities, construct a general equilibriumtheory of firm dynamics and aggregate growth
Estimate the structural parameters of the model using micro-leveldata
Conduct counterfactual policy experimentsIncumbent R&D subsidyEntry subsidySubsidy to incumbent fixed operation cost
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Today’s Roadmap
1 Factor reallocation in developed countries
2 Factor reallocation in developing countries
3 Reallocation of ideas
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SECTION 1:FACTOR REALLOCATION
IN DEVELOPED COUNTRIES
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The Model Economy
0 1
quality level
q
sector j
US Economy
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The Model Economy
0 1
quality level
q
sector j
GDP = Sectors combined
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Sector-specific Productivities
0 1
quality level
q
sector j
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Example of a Firm
0 1
quality level q
sector j
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Example of another Firm
0 1
quality level q
sector j
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Productivity Growth: Internal R&D
0 1
quality level q
sector j
internal R&D
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Productivity Growth: Internal R&D
0 1
quality level q
sector j
internal R&D
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Productivity Growth: External R&D
0 1
quality level q
sector j
External R&D
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Productivity Growth: External R&D
0 1
quality level q
sector j
External R&D
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Reallocation is Taking Place...
0 1
quality level q
sector j
External R&D
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Competition Creates Selection
0 1
quality level q
sector j
External R&D
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Eventually Some Firms Exit
0 1
quality level q
sector j
External R&D
Exit
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In the Meantime...
0 1
quality level q
sector j
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Some New Entrants Show Up
0 1
quality level q
sector j
new entrants
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And New Entrants Replace Incumbents
0 1
quality level q
sector j
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
R&D Input prices, wages/salaries, will increase.
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
Entrepreneurial talent is heterogeneous.
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
Some are good entrepreneurs and some are bad:
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General Equilibrium Effects of an Entry Subsidy
Aggregate price effect
Competition effect
Composition/Reallocation effect
Some are good entrepreneurs and some are bad:
VS
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Acemoglu, Akcigit, Bloom, Kerr (2013)
We estimate this model using US firms.
Data: Census of Manufacturing
Method: Simulated Method of Moments
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Acemoglu, Akcigit, Bloom, Kerr (2013)
We estimate this model using US firms.
Data: Census of Manufacturing
Method: Simulated Methods of Moments
4.2 Goodness of Fit
Table 2 reports the empirical moments that we target and the predicted values from our model.
The addition of dashed lines in Figures 2A-D for the model-implied moments provides a graphical
depiction (except for moments 20 and 21, which are not shown in these �gures).
Table 2. Moment Matching
# Moments Model Data # Moments Model Data1. 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
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
most of the moments our model is able to replicate the salient characteristics of data, including lower
exit rates for larger and older �rms, similar transition rates across �rms sizes and entry/exit, similar
R&D/sales intensities by �rm sizes and ages, and a reasonably good �t for sales and employment
growth across di¤erent types of �rms. Our growth rates for larger �rms are slightly negative in the
23
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Acemoglu, Akcigit, Bloom, Kerr (2013)
Findings:
Subsidy to incumbent R&D is not boosting growth.
Subsidy to entry is not boosting growth.
Taxing incumbent’s fixed operations increases growth byexploiting the selection/reallocation margins.
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Acemoglu, Akcigit, Bloom, Kerr (2013)
Findings:
Subsidy to incumbent R&D is not boosting growth.
Subsidy to entry is not boosting growth.
Taxing incumbent’s fixed operations increases growth byexploiting the selection/reallocation margins.
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Acemoglu, Akcigit, Bloom, Kerr (2013)
Findings:
Subsidy to incumbent R&D is not boosting growth.
Subsidy to entry is not boosting growth.
Taxing incumbent’s fixed operations increases growth byexploiting the selection/reallocation margins.
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SECTION 2:FACTOR REALLOCATION
IN DEVELOPING COUNTRIES
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Firm Dynamics in Developing Countries
hi
Graph from Hsieh and Klenow (2014).
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Firm Dynamics in Developing Countries
�Figure�1:��Plant�Employment�by�Age�in�the�Cross�Section�
US
Mexico
India
1/2
1
2
4
8Em
ploy
men
t (Ag
e <
5=1)
<5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 >=40
Age
Sources:�1994�1995�ASI�NSS�(India),�2003�Economic�Census�(Mexico),�and�2002�Manufacturing�Census�(U.S.).
Graph from Hsieh and Klenow (2014).
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Firm Dynamics in Developing Countries
�Figure�1:��Plant�Employment�by�Age�in�the�Cross�Section�
US
Mexico
India
1/2
1
2
4
8Em
ploy
men
t (Ag
e <
5=1)
<5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 >=40
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Sources:�1994�1995�ASI�NSS�(India),�2003�Economic�Census�(Mexico),�and�2002�Manufacturing�Census�(U.S.).
Graph from Hsieh and Klenow (2014).
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Firm Dynamics in Developing Countries
Why does reallocation among firms not taking place in India?
Credit constraints?
Size-dependent Policies?
An interesting fact: The best predictor of firm size in India is....
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Firm Dynamics in Developing Countries
Why does reallocation among firms not taking place in India?
Credit constraints?
Size-dependent Policies?
An interesting fact: The best predictor of firm size in India is....
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Firm Dynamics in Developing Countries
Why does reallocation among firms not taking place in India?
Credit constraints?
Size-dependent Policies?
An interesting fact: The best predictor of firm size in India is....
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 26
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Firm Dynamics in Developing Countries
Why does reallocation among firms not taking place in India?
Credit constraints?
Size-dependent Policies?
An interesting fact: The best predictor of firm size in India is....
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Firm Dynamics in Developing Countries
FAMILY SIZE!
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Firm Dynamics in Developing Countries
MAJOR OBSTACLE TO FIRM GROWTH:LACK OF DELEGATION
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Firm Dynamics in Developing Countries
0 # of product lines, n
V(n) Vself(n)
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 27
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Value Function as Contracts (µ) ImprovePage 1 of 1
9/24/2014file:///C:/Users/uakcigit/Dropbox/For%20Myself/Akcigit_Peters/Slides/Yale%202014/dele...
WE NEED TO ADD CONTRACTUAL FRICTIONS ON TOP OF THE
BASELINE FIRM DYNAMICS FRAMEWORK.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 28
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Value Function as Contracts (µ) Improve
0 # of product lines, n
V(n)
n*
Vself(n)
Vmanager(n)
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 29
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Value Function as Contracts (µ) Improve
0 # of product lines, n
V(n)
n*
Vself(n)
Vmanager(n)
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Value Function as Contracts (µ) Improve
0 # of product lines, n
V(n)
n*
Vself(n)
Vmanager(n)
Remark: Delegation is crucial for fighting decreasing returns.
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Akcigit, Alp, Peters (2014)
Introduce contractual frictions between owners and managers.
Estimate the model using data on Indian economy.
Findings:Lack of delegation can account for 50% of the observeddifferences in factor reallocation in the US vs in India.
Industrial policies, such as increased entry or small businesssubsidies, are very ineffective in generating growth due toobstacles in delegation.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 30
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Akcigit, Alp, Peters (2014)
Introduce contractual frictions between owners and managers.
Estimate the model using data on Indian economy.
Findings:Lack of delegation can account for 50% of the observeddifferences in factor reallocation in the US vs in India.
Industrial policies, such as increased entry or small businesssubsidies, are very ineffective in generating growth due toobstacles in delegation.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 30
![Page 56: The Impact of Industrial Policy on Firm Dynamics, Factor Reallocation, and Aggregate Productivity Growth, Ufuk Akcigit](https://reader033.vdocuments.net/reader033/viewer/2022060118/558b2b6ad8b42a76568b468c/html5/thumbnails/56.jpg)
Akcigit, Alp, Peters (2014)
Introduce contractual frictions between owners and managers.
Estimate the model using data on Indian economy.
Findings:
Lack of delegation can account for 50% of the observeddifferences in factor reallocation in the US vs in India.
Industrial policies, such as increased entry or small businesssubsidies, are very ineffective in generating growth due toobstacles in delegation.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 30
![Page 57: The Impact of Industrial Policy on Firm Dynamics, Factor Reallocation, and Aggregate Productivity Growth, Ufuk Akcigit](https://reader033.vdocuments.net/reader033/viewer/2022060118/558b2b6ad8b42a76568b468c/html5/thumbnails/57.jpg)
Akcigit, Alp, Peters (2014)
Introduce contractual frictions between owners and managers.
Estimate the model using data on Indian economy.
Findings:Lack of delegation can account for 50% of the observeddifferences in factor reallocation in the US vs in India.
Industrial policies, such as increased entry or small businesssubsidies, are very ineffective in generating growth due toobstacles in delegation.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 30
![Page 58: The Impact of Industrial Policy on Firm Dynamics, Factor Reallocation, and Aggregate Productivity Growth, Ufuk Akcigit](https://reader033.vdocuments.net/reader033/viewer/2022060118/558b2b6ad8b42a76568b468c/html5/thumbnails/58.jpg)
Akcigit, Alp, Peters (2014)
Introduce contractual frictions between owners and managers.
Estimate the model using data on Indian economy.
Findings:Lack of delegation can account for 50% of the observeddifferences in factor reallocation in the US vs in India.
Industrial policies, such as increased entry or small businesssubsidies, are very ineffective in generating growth due toobstacles in delegation.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 30
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SECTION 3:REALLOCATION OF IDEAS
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Safety Pin
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 32
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Walter Hunt (1796-1859)
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USPTO Patent Number 6281
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0
5
10
15
20
25
1975 1980 1985 1990 1995 2000grant year
domestic only all
in % terms
Fraction of Patents Sold
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Average = 5.5 years
0
.02
.04
.06
.08
.1
.12
Fre
quen
cy
0 4 8 12 16duration
in number of years
Patent Sale Duration
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 36
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Empirical Facts We Document
1 Real sales and market value are negatively correlated with thedistance 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 ownerdecreases.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 37
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Search-theoretic Model
γ , ′,
γ , pay P(x,z),
,
, ,
, earn q,, +qinnovate
don’t innovate
keep
try to sell
meet
don’t meet
/
1 ‐ i
i
1 /patent expires
sell
buy
don’t buy , ,
, ,
1
1
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 38
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Akcigit, Celik, Greenwood (2014)
We estimate the model using the micro firm and patent data.
We find that reallocation of ideas increases productivity growthfrom
1.8% → 2%
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 39
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Conclusions
Reallocation (of inputs and ideas) is a key driver of theproductivity growth.
General equilibrium effects might be vastly different than partialequilibrium.
It is important to preserve the micro structure while studyinggeneral equilibrium.
Very important to use micro data to discipline the right theory.
This is where OECD can be hugely helpful.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 40
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Conclusions
Reallocation (of inputs and ideas) is a key driver of theproductivity growth.
General equilibrium effects might be vastly different than partialequilibrium.
It is important to preserve the micro structure while studyinggeneral equilibrium.
Very important to use micro data to discipline the right theory.
This is where OECD can be hugely helpful.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 40
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Conclusions
Reallocation (of inputs and ideas) is a key driver of theproductivity growth.
General equilibrium effects might be vastly different than partialequilibrium.
It is important to preserve the micro structure while studyinggeneral equilibrium.
Very important to use micro data to discipline the right theory.
This is where OECD can be hugely helpful.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 40
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Conclusions
Reallocation (of inputs and ideas) is a key driver of theproductivity growth.
General equilibrium effects might be vastly different than partialequilibrium.
It is important to preserve the micro structure while studyinggeneral equilibrium.
Very important to use micro data to discipline the right theory.
This is where OECD can be hugely helpful.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 40
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Conclusions
Reallocation (of inputs and ideas) is a key driver of theproductivity growth.
General equilibrium effects might be vastly different than partialequilibrium.
It is important to preserve the micro structure while studyinggeneral equilibrium.
Very important to use micro data to discipline the right theory.
This is where OECD can be hugely helpful.
Ufuk Akcigit (UPenn & NBER) Firm Dynamics, Factor Reallocation and Growth September 26, 2014 40