Firm Dynamics in Developing Countries 1 Ufuk Akcigit University of Chicago & NBER Conference on Economic Growth - July 10, 2015 1 Based on a joint work with Harun Alp (UPenn) and Michael Peters (Yale) Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 1
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Firm Dynamics in Developing Countries1
Ufuk Akcigit
University of Chicago & NBER
Conference on Economic Growth - July 10, 2015
1Based on a joint work with Harun Alp (UPenn) and Michael Peters (Yale)Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 1
Background
Understanding the growth process requires agood understanding of micro players (firms &entrepreneurs) of the macroeconomy.
Going from micro-to-macro is crucial.
The back-and-forth dialogue between data andtheory is important.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 2
Background
Understanding the growth process requires agood understanding of micro players (firms &entrepreneurs) of the macroeconomy.
Going from micro-to-macro is crucial.
The back-and-forth dialogue between data andtheory is important.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 2
Background
Understanding the growth process requires agood understanding of micro players (firms &entrepreneurs) of the macroeconomy.
Going from micro-to-macro is crucial.
The back-and-forth dialogue between data andtheory is important.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 2
What is Our Research Approach?
Start with empirical regularities in the micro data.
Motivated by those regularities, construct ageneral equilibrium theory of firm dynamics andaggregate growth.
Estimate the structural parameters of the modelusing micro-level data.
Conduct counterfactual experiments.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 3
Motivation
Recent literature: Firm dynamics in poor countriesshow striking differences to those of rich countries
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 4
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 6
The stagnant firms in India Extra
... but aggregate importance of tiny producersstays stubbornly high
Age0-5 6-10 11-15 16-20 21-25 26+
Sha
re o
f Est
ablis
hmen
ts
0
0.2
0.4
0.6
0.8
1
India
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 7
Selection in the US vs India
Many small firms exist in the US as well....
... but they do not matter as much and exit quickly
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 8
Selection in the US vs India
SHARE OF SMALL ESTABLISHMENTS (COUNT)
Age0-5 6-10 11-15 16-20 21-25 26+
Sha
re o
f Est
ablis
hmen
ts
0
0.2
0.4
0.6
0.8
1
1.2
IndiaUS
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 8
Motivation: Entrepreneurial Selection
There are two types of entrepreneurs in the data:Schoar (2010), Hurst and Pugsley (2012), Decker, Haltiwanger,Jarmin and Miranda (2014)
Subsistence entrepreneurs:No intention to growWant to keep the business within the family.
Transformative entrepreneurs:Create businesses with the intention to innovate and growCreate employment for other workers and value added for theeconomy.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 9
Motivation: Entrepreneurial Selection
There are two types of entrepreneurs in the data:Schoar (2010), Hurst and Pugsley (2012), Decker, Haltiwanger,Jarmin and Miranda (2014)
Subsistence entrepreneurs:No intention to growWant to keep the business within the family.
Transformative entrepreneurs:Create businesses with the intention to innovate and growCreate employment for other workers and value added for theeconomy.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 9
Motivation: Entrepreneurial Selection
There are two types of entrepreneurs in the data:Schoar (2010), Hurst and Pugsley (2012), Decker, Haltiwanger,Jarmin and Miranda (2014)
Subsistence entrepreneurs:No intention to growWant to keep the business within the family.
Transformative entrepreneurs:Create businesses with the intention to innovate and growCreate employment for other workers and value added for theeconomy.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 9
Firm Dynamics in Developing Countries
Why are transformative entrepreneurs notgrowing in India?
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10
Firm Dynamics in Developing Countries
Why are transformative entrepreneurs notgrowing in India?
Credit constraints?
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10
Firm Dynamics in Developing CountriesFigure 3: Average Product and Firm Size
Note: Figure shows local linear regressions of log average product on log employment. We subtract the mean of the fitted value at log(employment)=4. Dashed lines represent 95 percent confidence bounds.
Note: Figure shows local linear regressions of log average product on log employment. We subtract the mean of the fitted value at log(employment)=4. Dashed lines represent 95 percent confidence bounds.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 43
Decomposing the US life-cycle
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
2
3
4US(Fitted 9)US w/ India Fitted 9
Institution-Age 6-10 11-15 16-20 21-25 26+Rule of Law 30% 31% 29% 28% 27%Human Capital 40% 38% 41% 38% 38%Financial Development 15% 14% 15% 17% 16%Rest 15% 17% 15% 17% 19%
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44
Decomposing the US life-cycle
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
2
3
4US(Fitted 9)US w/ India Fitted 9US w/ India ROL
Institution-Age 6-10 11-15 16-20 21-25 26+Rule of Law 30% 31% 29% 28% 27%Human Capital 40% 38% 41% 38% 38%Financial Development 15% 14% 15% 17% 16%Rest 15% 17% 15% 17% 19%
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44
Decomposing the US life-cycle
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
2
3
4US(Fitted 9)US w/ India Fitted 9US w/ India ROLUS w/ India ROL + HC
Institution-Age 6-10 11-15 16-20 21-25 26+Rule of Law 30% 31% 29% 28% 27%Human Capital 40% 38% 41% 38% 38%Financial Development 15% 14% 15% 17% 16%Rest 15% 17% 15% 17% 19%
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44
Decomposing the US life-cycle
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
2
3
4US(Fitted 9)US w/ India Fitted 9US w/ India ROLUS w/ India ROL + HCUS w/ India ROL + HC + PC
Institution-Age 6-10 11-15 16-20 21-25 26+Rule of Law 30% 31% 29% 28% 27%Human Capital 40% 38% 41% 38% 38%Financial Development 15% 14% 15% 17% 16%Rest 15% 17% 15% 17% 19%
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44
Decomposing the US life-cycle
Age0-5 6-10 11-15 16-20 21-25 +26
Mea
n E
mpl
oym
ent
1
2
3
4US(Fitted 9)US w/ India Fitted 9US w/ India ROLUS w/ India ROL + HCUS w/ India ROL + HC + PC
Institution-Age 6-10 11-15 16-20 21-25 26+Rule of Law 30% 31% 29% 28% 27%Human Capital 40% 38% 41% 38% 38%Financial Development 15% 14% 15% 17% 16%Rest 15% 17% 15% 17% 19%
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44
Conclusions
Firm selection and factor reallocation are key foreconomic growth yet they don’t happen indeveloping countries.Not everybody is destined to be a goodentrepreneur. (Right allocation of microcredits?)Credit constraints and size-dependent distortionsare (I am sure) important. Yet there is somethingelse that is fundamentally missing in developingcountries.Tranformative entrepreneurs need a goodplayground with strong rule of law and trust.
Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 45