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Dynamics of Young Firms

Paper Session

Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)

Parc 55, Davidson
Hosted By: American Economic Association
  • Chair: Huiyu Li, Federal Reserve Bank of San Francisco

Career Choice of Entrepreneurs, Inventors and Economic Growth

Ufuk Akcigit
,
University of Chicago
Harun Alp
,
Federal Reserve Board
Jeremy Pearce
,
Federal Reserve Bank of New York
Marta Prato
,
Bocconi University

Abstract

New technologies emerge and translate into economic growth through the team effort of inventors, entrepreneurs, and production workers. This paper provides a unified life-cycle framework to characterize the population split across these three groups and connects the relationship between entrepreneurs and inventors to economic growth. We proceed by linking detailed micro-data from Denmark on individual entrepreneurs, inventors, workers, and firms to a novel quantitative endogenous growth model with occupational sorting and matching between inventors and entrepreneurs. Empirically, we find that while parental exposure is a key determinant of entrepreneurship, sorting into inventing occupations is primarily determined by education and IQ. Entrepreneurs with higher ability, as proxied by IQ, hire more inventors, hire inventors of higher ability, create more innovative firms, and grow faster. Further, entrepreneurs who went to a school that has more high-IQ students hire more and better R&D workers, conditional on their own talent. We build the quantitative model based on this evidence and use it to characterize how entrepreneurs and inventors stimulate economic growth. Individuals self-select into different occupations and entrepreneurship depending on their characteristics (e.g., background, talent, preferences) and entrepreneurs assemble teams in order to innovate and grow firms. The model highlights the importance of assortative matching between talented entrepreneurs and inventors for the rise of successful firms. In addition to matching the data, the model admits various counterfactuals to study the underlying mechanics of entrepreneurs and inventors. We find that the assortative matching between entrepreneurs and R&D workers explains 7% of economic growth and 14% of firm growth, indicating the importance of matching the right
team early in the firm.

Dynamics and Determinants of Exporter Survival – A Machine Learning Approach

Abyaya Neopane
,
Australian National University

Abstract

Exporting is a precarious endeavor. In Australia, around 60 percent of all entrants exit in their first year, with more than half of them exiting in the first month alone. These firms start small, but those that survive expand rapidly and drive the country’s total trade in the subsequent years. One explanation in the literature regarding these dynamics is that exporters are hit with an ex-post shock upon entry; hence, some survive, and others do not. The paper finds that the answer is more nuanced – export market survival is a function of both firms’ ex-ante heterogeneities and is dependent on strategic complementary between exporters. Using the BLADE dataset, the study employs machine learning (ML) techniques to predict exporter survival. It runs a horse race of several ML models and selects random forest as the best-performing model. The relationships between the predictors and exporter survival are then examined using the Shapley values and regression framework. The results i) shed light on the determinants of exporter survival; ii) capture high-dimensional interaction among predictors; iii) offer policymakers insights into determining an efficacious way of targeting export promotion activities, which, in most countries, tend to be distributed in an ad hoc manner.

Dynamics of High-Growth Young Firms and the Role of Venture Capitalists

Yoshiki Ando
,
University of Pennsylvania

Abstract

How does venture capital (VC) financing help the growth of startup firms and impact aggregate output and consumption? Motivated by the substantial growth and upfront investment of VC-backed firms observed in administrative US Census data, this paper develops a firm dynamics model over the life cycle that centers on ex-ante heterogeneity in growth potential, innovation investment, and external financing. In the model, startups choose the source of financing from VC, Angel investors, and banks, where financial frictions arise from bank default costs and costs of raising equity. VC-backed firms achieve substantial growth as a result of endogenous sorting, equity-based funding, and managerial advice. The calibrated model implies that venture capitalists' advice accounts for around 22% of the growth of VC-backed firms. A counterfactual economy without VC financing would lose aggregate consumption by around 0.4%.

Experimental Evidence on Jobseeker Perceptions of Young Firms

Mikael Paaso
,
Erasmus University Rotterdam
Ratchanon Chotiputsilp
,
Erasmus University Rotterdam

Abstract

A growing literature has studied whether workers at young firms get paid more or less relative to equally skilled counterparts at mature firms (see e.g. Ouimet and Zarutskie, 2014 JFinEcon or Sorenson et al. 2021 OrgSci). A key challenge in this literature has been finding cases where the worker and/or the role they perform at a firm are comparable, as workers may select into certain kinds of firms or roles.

One driver of this selection effect may be perceptions of young firms. There are many narratives about young firms being better for risk-seeking workers etc.. But to what extent are these narratives actually supported by the data? How do workers perceive young firms? Surprisingly, the existing evidence has typically relied on large-scale surveys (Sauermann, 2017 StragEntJ and Sauermann and Roach, 2023 MgmtSci).

We use experimental methods where we elicit jobseeker preferences for related to job characteristics (independence, upside vs. safety, structure etc.) and then present hypothetical job ads to jobseekers. In two lab experiments (on students and online), we randomize whether the name and/or nature of the firm is revealed to test whether revelation of a firm's startup / young firm status affects the attractiveness of a job to workers with certain preferences. We find that startups and other young firms are generally perceived as "worse" employers among almost all groups of workers, but that this effect is diminished among those with high preferences for independence among several other traits.

We are in the process of replicating our experiment on a job board and hope to have results by the fall.

Product Switching and Young Firm Dynamics

Seula Kim
,
Pennsylvania State University
Karam Jo
,
Korea Development Institute

Abstract

Do firms seek a better product match and grow by dropping existing products and adding new ones? How does this behavior vary over the firm life-cycle and business cycle? This paper investigates a “product match-quality ladder” channel empirically by using a detailed product-firm level administrative database for the U.S. manufacturing sector and documents salient features of product switching by firms. We newly estimate the match quality of product-firm pairs and obtain the following set of results: i) young firms are less likely to drop products with low match quality than mature firms; ii) dropping low match-quality products can increase the likelihood of adding products and the quality of products added subsequently, and iii) has a positive impact on firm performance and growth. These indicate that proper product switching is important for young firms to climb up the product match-quality ladder and achieve fast growth. Lastly, we further look into cyclical variations of the channel and find that iv) the product switching pattern of young firms gets even more pronounced in recessions. This provides a potential source accounting for procyclical young firm activities.

The Impact of Firm Performance on Macroeconomic Outcomes: Evidence from Serial Entrepreneurs

Micole de Vera
,
University College London
Sonia Felix
,
Bank of Portugal
Sudipto Karmakar
,
Bank of England
Petr Sedlacek
,
University of New South Wales

Abstract

Why are some firms more successful than others and how does this shape aggregate outcomes? To address these questions, we use unique administrative data, exploiting information on serial entrepreneurs (owners of multiple firms) as impersonations of business success. First, we document that serial entrepreneurs are three times more likely to own high-growth firms (“gazelles”) and that their businesses disproportionately contribute to aggregate productivity growth, job creation and business dynamism. Second, we show that the success of serial entrepreneurs can largely be traced back to two key sources: their innate characteristics (primarily education and ability) and lower indebtedness of their firms.
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy