Essays on firm dynamics and growth

Abstract

This dissertation consists of three chapters that investigate the relationship between firm dynamics and aggregate growth. Chapter 1 presents new theory and evidence on the dynamics of firm size distributions in the context of economic development. Empirically, I document a positive correlation between the thickness of the right tail in the firm size distribution and the level of economic development. Theoretically, I develop a growth model based on idea search to rationalize this relationship as a feature of an asymptotic balanced growth path. In the model, I show that the rise in market concentration is a secular trend over development, and idea diffusion is a key driver behind the emergence of Zipf’s law in firm size distributions. Chapter 2 (coauthored with Qing Huang) presents an empirical analysis of firms’ exporting behaviors in newly discovered foreign markets, uncovering three key stylized facts. First, relative to old markets, new markets exhibit higher levels of churning but also witness higher conditional sales growth. Second, there is a cohort effect among exporters in the new markets. In a given export market, later cohorts tend to outperform earlier cohorts in terms of the quantity sold, revenue generated, and survival rates at the same age. Third, the cohort effect is attenuated in new markets where domestic firms have a higher prior familiarity. These findings imply that early exporters’ business activities help reduce trade barriers and facilitate exports. Chapter 3 explores the sources of the cohort effect through the lens of structural models of new exporter dynamics. I evaluate two leading models in the literature—demand learning and customer accumulation—by their compatibility with the cross-cohort firms’ lifecycles. I rule out a major class of demand learning models à la Jovanovic (1982) since they make inconsistent predictions with the observed parallel lifecycles across cohorts. Instead, I show that a simple model of customer base accumulation with advertising can quantitatively replicate the empirical cross-cohort exporter lifecycles. The model estimates suggest that rising foreign demand is the primary driver of the cohort effect: the increase in the initial customer base explains over 90% of the sales gains for later cohorts.