Multi-Market Service Firms

Multi-Market Service Firms

Antoine GervaisUniversity of Notre Dame

J. Bradford JensenMcDonough School of Business, Georgetown University

Peterson Institute for International EconomicsNBER

2

Background / Context

• We have learned a great deal over the past 15 years regarding the role of firms in international trade

• New areas of research being opened up by incorporation of transaction level trade data to economic census data

• One shortcoming is the vast majority of the research to date has focused on goods

• I have devoted a significant share of my time over the past 5 years to examining the prospects of analyzing trade in services

Composition of U.S. Employment, 2007

Source: 2007 Economic Census and Census of Governments

Mining0%

Utilities0%

Manufacturing10%

Construction5%

Transportation and warehousing

3%

Wholesale trade5%

Retail trade12%

Business Services25%

Personal Services25%

Federal Government2%

State and Local Government12%

Business and Personal Services

NAICS Code SectorEmployment

2007

Share of Total Employment

2007

Employment Growth

1997-200721 Mining 703,129 0.5% 38%22 Utilities 632,432 0.5% -10%23 Construction 7,399,047 5.5% 31%31-33 Manufacturing 13,333,390 9.9% -21%42 Wholesale trade 6,295,109 4.7% 9%44-45 Retail trade 15,610,710 11.5% 12%48-49 Transportation and warehousing 4,435,760 3.3% 52%51-56 Business Services 33,430,809 24.7% 29%

51 Information 3,428,262 2.5% 12%52 Finance and insurance 6,562,546 4.9% 12%53 Real estate and rental and leasing 2,249,353 1.7% 32%54 Professional, scientific, and technical services 8,121,171 6.0% 51%55 Management of companies and enterprises 2,915,644 2.2% 11%56 Administrative and support and waste remediation services 10,153,833 7.5% 38%

61-81 Personal Services 34,595,857 25.6% 23%61 Educational services 562,210 0.4% 75%62 Health care and social assistance 16,859,513 12.5% 24%71 Arts, entertainment, and recreation 2,070,524 1.5% 30%72 Accommodation and food services 11,587,814 8.6% 23%81 Other services (except public administration) 3,515,796 2.6% 8%

Federal Government 2,462,000 1.8% --State and Local Government 16,400,000 12.1% --

Source: U.S. Census Bureau

How are services traded?

• Modes of service trade:

• Mode 1 – Cross-border provision, e.g. software produced in one region and shipped via internet to another region

• Mode 2 – Consumption abroad, e.g. consumer travels to resort to consume service

• Mode 3 – Commercial presence in foreign region, e.g. restaurant opens local branch to serve foreign demand

• Mode 4 – Temporary movement of natural persons, e.g. consultant travels to customer to deliver services







2006

Travel 2 ……………………………………………………………………...

Passenger fares 3 ………………………………………………………….

Other transportation……………………………………………………..

Royalties and license fees………………………………………………

Other private services 4 15…………………………………………………..

Education 5………………………………………………………………..

Financial services 16……………………………………………………….

Insurance services 6 ……………………………………………………

Telecommunications 7………………………………………………….

Business, professional, and technical services 16…………………

Computer and information services 8 16……………………………….

Management and consulting services 9………………………………

Research and development and testing services 9………………..

Operational leasing 16………………………………………………………

Other business, professional, and technical services 10 16…………..

Accounting, auditing, and bookkeeping services………………..

Advertising……………………………………………………………

Architectural, engineering, and other technical services………..

Construction ………………………………………………………….

Industrial engineering……………………………………………………

Installation, maintenance, and repair of equipment…………………

Legal services……………………………………………………………

Medical services 11………………………………………………………….

Mining 12……………………………………………………………………..

Sports and performing arts……………………………………………..

Trade-related services 13………………………………………………..

Training services…………………………………………………………

Other 14…………...

Other services…………………………………………………………...

Film and television tape rentals……………………………………….

Other…………………………………………………………………………

Data Available

2001

Travel 2 ……………………………………………………………………...

Passenger fares 3 ………………………………………………………….




Education 5………………………………………………………………..






Management and consulting services 9………………………………

Research and development and testing services 9………………..




Other services…………………………………………………………...


Other…………………………………………………………………………

Data Available

1992

Travel 2 ……………………………………………………………………...

Passenger fares 3 ………………………………………………………….




Education 5………………………………………………………………..





Mining 12……………………………………………………………………..

Other services…………………………………………………………...


Other…………………………………………………………………………

1997

Travel 2 ……………………………………………………………………...

Passenger fares 3 ………………………………………………………….




Education 5………………………………………………………………..









Other services…………………………………………………………...


Other…………………………………………………………………………

Data Available

1992

Travel 2 ……………………………………………………………………...

Passenger fares 3 ………………………………………………………….




Education 5………………………………………………………………..





Mining 12……………………………………………………………………..

Other services…………………………………………………………...


Other…………………………………………………………………………

Data Available

Previous Work on Trade in Services

• Jensen and Kletzer (2006), Jensen (forthcoming), and Gervais and Jensen (on-going)

• Exploit mismatch of production and consumption to identify activities that can be provided at a distance

• Quick summary of findings:– A significant share of employment is in tradable service

activities– These activities are qualitatively different from non-tradable

services and manufacturing– The empirical results have important implications for US

comparative advantage and US trade policy







13

Headquarters and FDI

• “Classic” question

• Early focus on “horizontal” FDI, but literature moves on to “vertical” FDI– Caves (1971), Hymer (1976), and Dunning (1977)– Helpman (1984), Markusen (1984)– Antras (2003)

• Limited empirical analysis– Brainard (1993), Yeaple (2003)– Hanson, Mataloni, Slaughter (2005)– Nunn and Trefler (2008), Bernard, Jensen, Redding, and Schott (2010)– Desai, Foley, and Hines (2009)

Overview

• Consider the relationship between headquarters activity and multi-market operation (FDI) in the service sector

• Develop a model of market seeking entry in the face of prohibitive trade costs for final output– Firms choose level of headquarters activity and number of

markets

• Focus on non-tradables, but interested in potential for trade policy to affect employment in U.S. via headquarters supporting FDI– Identify industries where FDI is likely– Investigate relationship between FDI and headquarters – Hope ultimately (not here today) to estimate domestic

headquarters employment impact of increased FDI

Empirical Approach

• International FDI data shortcomings

• Use detailed microdata on the wholesale, retail, and service sectors collected by the U.S. Census Bureau– Domestic data, but mechanism similar to FDI

• Investigate:– Prevalence of/relationship between multi-market and

headquarters activity– Changes over time– Industry and firm level relationships

Preview of Findings

• Significant variation in headquarters and multi-market activity across industries and firms within industries

• Positive correlation between headquarters activity and multi-market firms across industries

• Positive correlation between industry characteristics and increases in number of markets firms operate in

• Firm HQ activity positively associated with firms’ number of markets and increases in firms’ number of markets

Data

• Economic Census data for 1987, 1997– Census of Services– Census of Wholesale– Census of Retail

• Headquarters Activities – Census of Auxiliaries 1987

Data Issues

• Census of Manufactures– Firm ownership– Location– Industry classification– Employment– Payroll– Revenue– Non-production/

production– Capital stock by type– Materials, energy inputs– Periodic information on

other inputs (technology…)

• Census of Services– Firm ownership– Location– Industry classification– Employment– Payroll– Revenue

Data Issues

• Industry Classification changes – Restricts us to 1987 to 1997 (both available on 1987 SIC

basis)

• Finance, Insurance, and Real Estate sector and Telecommunications and Broadcasting industries not included in 1987 Economic Census

Measures

• Measures of number of markets:– Number of BEA labor market areas (183 regions)– Number of establishments

• HQ activity measures– Total firm headquarters activity allocated across industries based on

an industry’s share of firm revenue– Headquarters dummy– Other inputs = Revenue – Payroll

• Very large number of very small service producers– To construct industry level measures and to characterize firm

characteristics, use revenue weighted means– Cross-industry and regression results are un-weighted

Prevalence of Multi-Market Firms

1 2-5 6-50 51-100 100+Manufacturing 34 33 32 0 0Services 51 13 25 5 6

1 2-5 6-10 51-100 100+Manufacturing 31 32 33 4 0Services 45 14 21 6 14

Note: The table shows the share of sector output accounted for by firms that operate in 1 market, 2-5 markets, etc.

Prevalence of Multi-Market FirmsPercent of Sector Output by Firms' Number of Markets

Number of Regions

Number of Establishments

Variation across Industries

Mean Std dev Max. HQ Intensity Payroll

Weighted Mean Number of Regions 11 14 94 0.69624 0.46812<.0001 <.0001

Weighted Mean Number of Estabs 45 119 1,061 0.52265 0.49979<.0001 <.0001

HQ Payroll Intensity 0.04 0.04 0.16HQ Payroll Level ($000) 113,197 305,501 3,293,246

Number of Industries = 269

Correlation

Number of Markets and Headquarters ActivityIndustry Level Measures 1987

Note: Table shows the mean, standard deviation, and maximum of industry-level measures. The weighted mean measures are constructed by taking the revenue-weighted mean across firms within an industry. The mean and standard deviation across industries are unweighted.

Change over Time

• Take information and communications technology changes as a “general purpose technology”

• Decrease in cost of opening/managing affiliates

• Related literature on growth of national retail chains– Basker (2005) – Foster, Haltiwanger, and Krizan (2006)– Jarmin, Klimek, and Miranda (2009)

Variation across Industries

Number of Regions Quartile: 1 2 3 4HQ Payroll Intensity 0.013 0.033 0.039 0.073

(.016) (.028) (.022) (.04)HQ Payroll Level 19,514 56,355 92,777 285,542

(49,778) (97,166) (123,832) (555,689)Number of Regions 1987 1.3 3.1 8 30

(.279) (.838) (2) (17)Number of Regions 1997 3.1 7.2 13 38

(8) (8) (13) (27)

Number of Estabs Quartile: 1 2 3 4HQ Payroll Intensity 0.014 0.031 0.041 0.072

(.019) (.024) (.027) (.039)HQ Payroll Level 12,612 65,002 101,885 274,792

(20,663) (101,356) (128,213) (558,940)Number of Estabs 1987 1.8 5.3 18 157

(.586) (1.81) (7) (201)Number of Estabs 1997 4.1 34.2 37 278

(7) (150) (44) (356)

Number of Regions Quartiles

Number of Establishments Quartiles

Industry Descriptive Statistics by Number of Markets Quartiles

Changes over Time in Number of Markets

Regions Establishments

Number of Regions 1987 0.241 0.430<.0001 <.0001

Number of Estabs 1987 0.260 0.494<.0001 <.0001

HQ Payroll Intensity 1987 0.259 0.313<.0001 <.0001

log(HQ Payroll) 1987 0.130 0.1930.0329 0.0015

Change in Number of 1987-1997

Correlation of Industry Level Measures

Model

• Develop a simple general equilibrium model of the decision to enter new markets.

• We assume that the final “output” of the firm is nontradable – to serve additional consumers firms need to enter new markets.

• We assume that firms can make investments in an asset that is non-rivalrous within the firm.

• Firms endogenously choose the optimal level of headquarters services and the number of locations in which to operate, conditional on demand characteristics and cost of managing multiple establishments.

Model: Preferences and Demand

Model: Technology and Production Costs

Model: Key Relationship

Firm Characteristics

Number of Regions Quartile: 1 2 3 4Firm Sales ($000) 72,419 1,010,891 827,861 7,988,173Firm Employment 260 1,877 2,013 22,489Firm HQ Payroll Intensity 0.01 0.05 0.07 0.11Firm HQ Indicator 0.06 0.39 0.51 0.74log(Other Inputs) 8.72 11.18 11.27 13.39Multi-Market Indicator 0.12 0.39 0.62 0.78Number of Regions 1.54 4.15 12.77 40.67

N 347,164 95,264 195,400 209,076

Number of Estabs Quartile: 1 2 3 4Firm Sales ($000) 84,619 872,065 1,093,796 8,531,120Firm Employment 187 1,692 2,330 24,314Firm HQ Payroll Intensity 0.01 0.04 0.07 0.12Firm HQ Indicator 0.06 0.37 0.55 0.73log(Other Inputs) 9.15 10.80 11.68 13.30Multi-Estab Indicator 0.23 0.47 0.72 0.83Number of Estabs 2.20 6.74 24.74 329.59

N 245,065 176,587 175,798 249,454

Continuers: Firm Means by Industry Number of Markets QuartilesRevenue-Weighted Mean Firm Characteristics, 1987

Firms Add and Drop Markets

Number of Regions Quartile: 1 2 3 4Add Region Indicator 0.08 0.27 0.51 0.64Drop Region Indicator 0.06 0.33 0.52 0.63

N 347,164 95,264 195,400 209,076

Number of Estabs Quartile: 1 2 3 4Add Estab Indicator 0.16 0.40 0.65 0.79Drop Estab Indicator 0.17 0.44 0.66 0.80

N 245,065 176,587 175,798 249,454

Prevalence of Firm Market Adds and DropsRevenue-Weighted Means by Industry Quartile

Firm Number of Regions

Dependent Variable: log(Firm Number Regions)

Firm HQ Dummy 1987 0.761 *** 0.343 *** 0.738 *** 0.349 ***(.002) (.004) (.002) (.004)

x log(Ind. Regions) 0.171 *** 0.158 ***(.002) (.002)

log(Firm Sales 1987) 0.035 *** 0.010 *** 0.044 *** 0.013 ***(.000) (.000) (.000) (.000)

x log(Ind. Regions) 0.015 *** 0.018 ***(.000) (.000)

log(Industry Sales 1987) -0.010 *** -0.010 ***(.000) (.000)

log(Industry Number of Regions) 0.007 *** -0.079 ***(.000) (.001)

Intercept -0.032 *** 0.111 ***(.002) (.003)

SIC Fixed Effects No No Yes YesN= 846,904 846,904 846,904 846,904 R-squared 0.260 0.286 0.278 0.302

Firm Level Regressions

Firm Number of Estabs

Dependent Variable: log(Firm Number Estabs)

Firm HQ Dummy 1987 1.383 *** 0.634 *** 1.315 *** 0.622 ***(.003) (.007) (.003) (.006)

x log(Ind. Estabs) 0.192 *** 0.177 ***(.002) (.002)

log(Firm Sales 1987) 0.074 *** 0.023 *** 0.101 *** 0.037 ***(.000) (.000) (.000) (.000)

x log(Ind. Estabs) 0.020 *** 0.023 ***(.000) (.000)


log(Industry Number of Estabs) 0.016 *** -0.103 ***(.000) (.001)

Intercept 0.001 0.320 ***(.004) (.004)



Change in Number of Regions

Dependent Variable: Change in Firm Number of Regions

Firm HQ Dummy 1987 0.738 *** 0.458 *** 0.704 *** 0.539 ***(.016) (.038) (.016) (.038)

x log(Ind. Regions) 0.120 *** 0.068 ***(.015) (.016)

log(Firm Sales 1987) 0.020 *** 0.012 *** 0.026 *** 0.016 ***(.001) (.002) (.001) (.003)

x log(Ind. Regions) 0.004 *** 0.006 ***(.001) (.001)


log(Industry Number of Regions) 0.010 *** -0.017 ***(.001) (.006)

Intercept 0.122 *** 0.170 ***(.020) (.022)



Change in Number of Estabs

Dependent Variable: Change in Firm Number of Estabs

Firm HQ Dummy 1987 5.408 *** 1.794 *** 5.166 *** 2.234 ***(.124) (.278) (.126) (.282)

x log(Ind. Estabs) 0.951 *** 0.757 ***(.071) (.072)

log(Firm Sales 1987) 0.140 *** -0.037 ** 0.210 *** -0.031(.009) (.016) (.011) (.020)

x log(Ind. Estabs) 0.070 *** 0.088 ***(.005) (.006)


log(Industry Number of Estabs) 0.041 *** -0.378 ***(.007) (.030)

Intercept 0.473 *** 1.614 ***(.160) (.177)

SIC Fixed EffectsN= 846,904 846,904 846,904 846,904 R-squared 0.003 0.004 0.005 0.005


Change in Log(Number of Regions)

Dependent Variable: Change in log(Number of Regions)

Firm HQ Dummy 1987 0.018 *** 0.013 *** 0.016 *** 0.013 ***(.001) (.003) (.001) (.003)

x log(Ind. Regions) 0.002 0.001(.001) (.001)

log(Firm Sales 1987) 0.001 *** 0.001 *** 0.001 *** 0.001 ***(.000) (.000) (.000) (.000)

x log(Ind. Regions) 0.000 * 0.000(.000) (.000)


log(Industry Number of Regions) 0.001 *** 0.000(.000) (.001)

Intercept 0.005 *** 0.006 ***(.002) (.002)



Change in log(Number of Estabs)

Dependent Variable: Change in log(Firm Number of Estabs)

Firm HQ Dummy 1987 0.023 *** 0.059 *** 0.020 *** 0.054 ***(.002) (.004) (.002) (.005)

x log(Ind. Estabs) -0.010 *** -0.009 ***(.001) (.001)

log(Firm Sales 1987) -0.002 *** -0.001 *** -0.003 *** -0.003 ***(.000) (.000) (.000) (.000)

x log(Ind. Estabs) 0.000 *** 0.000 *(.000) (.000)

log(Industry Sales 1987) 0.001 *** 0.001 ***(.000) (.000)

log(Industry Number of Estabs) 0.000 ** 0.002 ***(.000) (.000)

Intercept -0.006 ** -0.013 ***(.003) (.003)



Alternative HQ Measure: Other Inputs

Dep. Var.: log(Number of Regions) Change in Number of Regions Change in log(Number of Regions)log(Firm Other Inputs 1987) 0.033 *** 0.024 *** 0.000

(.001) (.006) (.001)log(Firm Sales 1987) 0.029 *** 0.019 *** 0.001 **

(.001) (.006) (.001)SIC Fixed Effects Yes Yes YesN= 846,904 846,904 846,904 R-squared 0.148 0.004 0.003

Robustness: Other Inputs Measure

Alternative HQ Measure: Other Inputs

Dep. Var.: log(Number of Estabs) Change in Number of Estabs Change in log(Number of Estabs)log(Firm Other Inputs 1987) 0.049 *** 0.207 *** 0.000

(.001) (.047) (.001)log(Firm Sales 1987) 0.084 *** 0.128 *** -0.003 ***

(.001) (.047) (.001)SIC Fixed Effects Yes Yes YesN= 846,904 846,904 846,904 R-squared 0.227 0.003 0.004

Robustness: Other Inputs Measure

Preliminary Conclusions

• Significant variation in headquarters and multi-market activity across industries and firms within industries

• Positive correlation between headquarters activity and multi-market firms across industries and increases in number of markets

• Firm HQ activity positively associated with firms’ number of markets and increases in firms’ number of markets

• Approach holds promise for investigating effect of increased liberalization of FDI on US employment

Thank You

Geographic Concentration of Industries

Geographic Concentration of Industries

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0 100 200 300 400 500 600 700 800 900 1000

NAICS Industry

Gin

i Co

eff

icie

nt

Ag Mining Utilities Construction Manufacturing Wholesale Retail Transportation Services Public Admin

Mfg EMP – 86% T

Prof Svc EMP –70% T

Ed/Health EMP –98% N-TOth Svc EMP –80% N-T

Ag/Min EMP –100% T

Source: Jensen and Kletzer (2006)

Tradable Services are Different

Non-tradable Industry Tradable IndustryNumber of Workers 2,235,432 12,994,490Average Earnings $44,014 $49,952Share with B.A. 16% 24%Share with Advanced Degree 3% 7%Share in Tradable Occupations 26% 34%

Non-tradable Industry Tradable IndustryNumber of Workers 8,038,246 18,430,199Average Earnings $42,226 $66,454Share with B.A. 29% 50%Share with Advanced Degree 7% 17%Share in Tradable Occupations 31% 60%Source: Author's calculations, 2007 American Community Survey

Manufacturing (NAICS 30s)

Professional Services (NAICS 50s)

Worker Characteristics for Select I ndustries

Source: Author’s calculations, 2007 American Community Survey

Potential Labor Market Impact

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 110,000 120,000 130,000

Industry Average Wage

Sh

are

of

Sec

tor

Em

plo

ymen

tTradable Manufacturing (NAICS 30s) Tradable Business Services (NAICS 50s)

Source: Author’s calculation using 2007 County Business Patterns data.

Documents

Multi-Market Service Firms