Session 3: One-country Evidence - European Investment Bank...2007 2010 2013 2016 domestic exporter exporter and importer importer Having in mind that the Polish rm have bene ted from

WHAT HAPPENED TO BUSINESS DYNAMISM?

Session 3: One-country Evidence

Ufuk AkcigitUniversity of Chicago

March 19, 2019 - European Investment Bank

Paper #1

Figure 2: Aggregate markups in Poland

1.4

1.6

1.8

2004 2008 2012 2016

median average (weighted by sales) unweighted average

the nature of their economic activity. But technically it can lead to unwarranted variation

in real variables due to using sectoral deflators. Therefore, we consider the case in which

we keep NACE code constant at the most recent value.

A broad set of aggregate markups obtained under various empirical strategies is de-

picted on figure 3. Eyeballing the series and comparing with the baseline results one might

conclude that decline in markups is quite robust to the choice of empirical measurement.

In all cases the median markups have been systematically decreased over the considered

period and the overall fall in this period ranges from 8% to 25%. The dynamics of the

weighted average is slightly more heterogeneous across different measures of the markups

and in one case there is no change. 9 However, if we compare the peak of markups

around 2005 with the last value the decline in markups can be unquestionably observed,

irrespectively of the empirical strategy.

In the next step, we quantify the role of changes in the sectoral composition of the

economic activity in the markup change. One might suppose that the fall in markups has

been driven by a rising role of industries, in which the markups are substantially smaller.

This effect can be quantified by using the shift-share analysis. In general, the change in

the (weighted) average markups within any time period can be decomposed into three

components:

∆µt =∑

j

sj,t−1∆µj,t +∑

j

µj,t−1∆sj,t +∑

j

∆µj,t∆sj,t, (7)

where sj,t is the share in sales (weighting variable) of a sector j in period t. The first

component (within) captures the effects of changes in average markups at the industry

while the second term (between) arises when there is a substantial shift in composition.

The remaining component measures the joint effect of simultaneous changes in markups

9This refers to the case when the underlying parameters of the translog production function for output

were estimated at the WIOD industry level. However, these results should be interpreted with caution due

to large number of observations with negative implied output elasticities. Around 48.3% of observation

from the final sample were dropped because at least one estimated elasticity was below zero. It is an

extremely larger fraction of observations than in our baseline setting (< 1%) or other alternative strategies

(ca. 0.5%− 7.5%).

10

Figure 8: Dispersion and skewness of

markups (2002=1)

1.0

1.2

1.4

1.6

2004 2008 2012 2016

interquantile range (q90/q10) sd skewness

Figure 9: Evolution of markups in TFP

classes

1.2

1.6

2.0

2003 2005 2007 2009 2011 2013 2015

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1

Note: the firms are grouped based on deciles of

average level of the log TFP.

focus on Slovenian manufacturing firms between 1994 and 2002 and document that the

average export premium for markups is about 15%. As it can be seen from figure 10,

this difference is not stable over the time. Moreover, after 2005 the fall in markups was

more pronounced for the exporting enterprises and differences between these group has

become less systematic. In addition, the stronger fall in markups for exporters can be

unambiguously confirmed for alternative measures of the markups (see B.3 and B.4).

Figure 10: The average markups

for exporters and non-exporting firms

(weighted mean)

1.6

1.7

1.8

1.9

2004 2008 2012 2016

exporter non−exporting

Figure 11: The average markups for ex-

porters, importers and domestic firms

(weighted mean)

1.5

1.6

1.7

1.8

1.9

2.0

2007 2010 2013 2016

domestic exporter exporter and importer importer

Having in mind that the Polish firm have benefited from the trade liberalization and

international integration we also look at the markups in groups with different international

linkages. Given the data constrains11, our population is additionally splited into four

groups: (i) firms exporting and importing, (ii) enterprises reporting only exports, (iii) firms

with imports only, and (iv) enterprises without international trade linkages. Intuitively,

the most internationally integrated firms belong to the first group. A visual inspection

11Our database provides data on imports since 2005 and distinguishes only the imports of intermediates.

14

Gradzewiczy and Mućk (2018)

Interesting finding: Markups declined in Poland.Due to globalization (?)

———————————————Ufuk Akcigit (University of Chicago) 2

10 Empirical Trends

(Mostly based on the US data)


Fact 1: Market concentration has risen.

Figure: MARKET CONCENTRATION IN MANUFACTURING

6870

7274

Top2

0 C

once

ntra

tion

3840

4244

Top4

Con

cent

ratio

n

1980 1990 2000 2010Year

Top4 CR with Sales Top20 CR with Sales

Source: Autor, Dorn, Katz, Patterson, and Van Reenen (2017).


Fact 2: Average markups have increased.

Figure: AVERAGE MARKUP OVER TIME

1.2

1.3

1.4

1.5

1.6

Mar

kup

1980 1990 2000 2010Year

Source: De Loecker and Eeckhout (2017).


Fact 3: Profit share of GDP has increased.

Figure: PROFITS AS A FRACTION OF GDP OVER TIME

.02

.12

.04

.06

.08

.1

Prof

it Sh

are

of G

DP,

Afte

r Tax

.02

.06

.1.1

4Pr

ofit

Shar

e of

GD

P, B

efor

e Ta

x

1980 1990 2000 2010Year

Before Tax After Tax

Source: Akcigit and Ates (2019), BEA NIPA Table 1.15.


Fact 4: The labor share of output has gone down.

Figure: LABOR SHARE

.6.6

2.6

4.6

6.6

8La

bor S

hare

of G

DP

1980 1990 2000 2010Year

Source: Karabarbounis and Neiman (2013).


Fact 5: Negative link b/w concentration and labor share

Figure: SECTOR-LEVEL CHANGES IN CONCENTRATION AND LABOR SHARE

−0.27

−0.13−0.12

−0.09 −0.09−0.09

−0.04−.4

−.3−.2

−.10

Finance Services Utils&Transport Manufacturing Retail Wholesale All

Source: Autor, Dorn, Katz, Patterson, and Van Reenen (2017).


Fact 6: Larger gap btw. frontier and laggards.

Figure: LABOR PRODUCTIVITY OF FRONTIER AND LAGGARD FIRMS

0.1

.2.3

Nor

mal

ized

Ave

rage

Pro

duct

ivity

2002 2004 2006 2008 2010 2012Year

Frontier Firms Laggard Firms

Source: Andrews, Criscuolo, and Gal (2016).———————————————Ufuk Akcigit (University of Chicago) 9

Fact 7: Firm entry rate has declined.

Figure: FIRM AND ESTABLISHMENT ENTRY RATES IN THE UNITED STATES

810

1214

16Es

tabl

ishm

ent E

ntry

Rat

e

810

1214

Firm

Ent

ry R

ate

1980 1990 2000 2010Year

Firms Establishments

Source: Decker, Haltiwanger, Jarmin, and Miranda (2016a)


Fact 8: Employment share of young firms has fallen.

Figure: EMPLOYMENT SHARE OF < 5-YEAR OLD FIRMS

.08

.18

Empl

oym

ent S

hare

of <

5-Y

ear-O

ld F

irms

.1

.12

.14

.16

1980 1990 2000 2010Year

Source: Decker, Haltiwanger, Jarmin, and Miranda (2016a).


Fact 9: Job reallocation has slowed down.

Figure: GROSS JOB REALLOCATION

2628

3032

3436

Job

Rea

lloca

tion

Rat

e

1980 1990 2000 2010Year



Fact 10: Dispersion of firm growth has decreased.

Figure: GROWTH RATE DISPERSION HAS SHRUNK

.5.5

5.6

.65

.7St

anda

rd D

evia

tion

of E

stab

lishm

ent G

row

th

.4.4

5.5

.55

Stan

dard

Dev

iatio

n of

Firm

Gro

wth

1980 1990 2000 2010Year

Firms Establishments



Ten Facts about the U.S. Economy

1. Market concentration has risen.2. Average markups have increased.

3. Average profits have increased.

4. The labor share of output has gone down.

5. Market concentration and labor share are negatively associated.

6. Labor productivity gap between ”the best” and ”the rest” has widened.

7. Firm entry rate has declined.

8. The share of young firms in economic activity has declined.

9. Job reallocation has slowed down.

10. The dispersion of firm growth has decreased.


What Has Changed?


Many Things... Some Examples:EFFECTIVE CORPORATE TAX RATE

1020

3040

50C

orpo

rate

Tax

Rat

es

1970 1980 1990 2000 2010year

Statutory Effective Effective, capital income

WORKER/UNION POWER

R&D SUBSIDY

Make America Great Again!

MN MN MN MNIAIN

IA

WIWV

MN

IN

WIWVIN

MN

CA

IA

KS

IA

CA

ND

MN

WVIN

WICA

IN

OR

WI

MNIA

NDKS

WVIN

CA

IA

WV

KSND

MN

WI

ORIL

IN

CA

OR

IAMN

ND

WV

KS

MAIL

WI

KSCA

IN

WI

IA

IL

MN

WV

MA

ORND

IA

MA

MN

KS

ILOR

WV

CAWI

ND

CTNH

IN

MA

NJ

MO

KSCA

RI

IN

WI

MNIA

ND

IL

NH

OR

CT

WV

AZ

KS

WV

RI

WI

MNIA

OR

AZ

CTMA

ND

MO

NJ

IN

CA

IL

1 1 1

3

56

89

1011 11

13

1716

Introduction of R&Dtax credit (ERTA)

.55

.6

.65

.7

US Share in T

otal Patents (dashed).02

.025

.03

.035

.04

R&

D/S

ales

(so

lid)

1975 1980 1985 1990 1995Year

— R&D Intensity - - - Patenting Share of the U.S.INTEREST RATE

factors has operated to reduce natural or equilibriumreal interest rates.

What has the consequence been? Laubach andWilliams [2003] from the Federal Reserve establisheda methodology for estimating the natural rate of inter-est. Essentially, they looked at the size of the outputgap, and they looked at where the real interest rate was,and they calculated the real interest rate that went withno output gap over time. Their methodology has beenextended to this point, as shown in Figure 14, and itdemonstrates a very substantial and continuing declinein the real rate of interest.

One looks at a graph of the 10-year TIP and seesthe same picture. Mervyn King, the former governor of

the Bank of England, has recently constructed a timeseries on the long-term real interest rate on a globalbasis, which shows a similar broad pattern of continu-ing decline.

I would argue first that there is a continuingchallenge of how to achieve growth with financialstability. Second, this might be what you would expectif there had been a substantial decline in natural realrates of interest. And third, addressing these challengesrequires thoughtful consideration about what policyapproaches should be followed.

3. Addressing Today’s MacroeconomicChallenges

So, what is to be done if this view is accepted? As amatter of logic, there are three possible responses.

Stay patient

The first possible response is patience. These thingshappen. Policy has limited impact. Perhaps one isconfusing the long aftermath of an excessive debtbuildup with a new era. So, there are limits to whatcan feasibly be done.

I would suggest that this is the strategy that Japanpursued for many years, and it has been the strategythat the U.S. fiscal authorities have been pursuing forthe last three or four years. We are seeing very power-fully a kind of inverse Say’s Law. Say’s Law wasthe proposition that supply creates its own demand.Here, we are observing that lack of demand creates itsown lack of supply.

Figure 13. Central Bank Reserves

Notes: Total assets in USD, ratio to nominal GDP in USD. Advanced economies: Australia, Canada, Denmark, the Euro Area,Japan, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States. Emerging economies:Argentina, Brazil, Chile, China, Chinese Taipei, Colombia, the Czech Republic, Hong Kong SAR, Hungary, India, Indonesia, Korea,Malaysia, Mexico, Peru, the Philippines, Poland, Russia, Saudi Arabia, Singapore, South Africa, Thailand and Turkey. Sources: IMF,National Data, Haver Analytics & Fulerum Asset Management.

Source: Financial Times.

Figure 14. Natural Rate of Interest

0

2P

erc

en

t 4

6

1960q1 1970q1 1980q1 1990q1

Date

2000q1 2010q1

Natural Rate of Interest, from Laubach and Williams (2003)

Source: Updated estimates from www.frbsf.org/economic-research/economists/john-williams/.

U.S. ECONOMIC PROSPECTS

71


TheoryTheory

Akcigit and Ates (2019):”What Happened to U.S. Business Dynamism?”

I Endogenous mark-ups and market structure.

I Schumpeterian step-by-step innovation model

Explicit competition margin:=⇒ incumbents innovate to increase their markups.=⇒ followers innovate to catch-up and leapfrog the leader if

they have “hope”.

I Similarly, entrants enter if and only if they have the hope of takingdown the incumbents.

I Entrants are “forward looking”.


I Endogenous mark-ups and endogenous market structure.I Dynamic macro-growth model with strategic interaction.I Explicit focus on transitional dynamics.

Explicit competition margin:=⇒ incumbents innovate to increase their markups.=⇒ followers innovate to catch-up and leapfrog the leader if

they have “hope”.

I Similarly, entrants enter if and only if they have the hope of takingdown the incumbents.

I Entrants are “forward looking”.———————————————

Ufuk Akcigit (University of Chicago) 17

Horse Race Among Alternative Fundamentals:

1. Lower Effective Corporate Tax Rate.

2. Higher R&D Subsidies.

3. Higher Entry Costs.

4. Lower Knowledge Diffusion.

5. Declining Interest Rate.

6. Ideas Getting Harder.

7. Lower Worker Power.


Data vs Model Predictions

Experiment: Shock BGP through one channel at a time

Table: Qualitative experiment results

DataLower

corporatetax

HigherR&D

subsidies

Higherentrycost

Lowerknowledgediffusion

Declininginterest

rate

Ideasgettingharder

Weakerunionpower

Concentration ↑ ←→ ←→ ←→ ↑ ←→ ↓ ←→Markups ↑ ←→ ←→ ←→ ↑ ←→ ↓ ↑Profit share ↑ ←→ ↓ ←→ ↑ ↓ ↓ ↑Labor share ↓ ←→ ↑ ←→ ↓ ↑ ↑ ↓Frontier vs. laggard gap ↑ ←→ ←→ ←→ ↑ ←→ ←→ ↑Entry ↓ ↑ ←→ ↓ ↓ ↑ ↓ ↑Young firms’ empl. share ↓ ←→ ↓ ↓ ↓ ←→ ↓ ←→Gross job reallocation ↓ ↑ ↑ ←→ ↓ ↑ ↓ ↑Dispersion of firm growth ↓ ↓ ↓ ↑ ↓ ↓ ↑ ↓


What about Welfare?


What Do These Trends Mean for Policy?

KNOWLEDGE DIFFUSION AND WELFARE19802010

Source: Akcigit and Ates (2019)


Empirical Trendson IP and Innovation


Empirical Fact (1)→ Patenting by new entrants has declined.

PATENTING SHARE BY NEW ENTRANTS

.04

.05

.06

.07

.08

.09

Entra

nt S

hare

1980 1990 2000 2010year



Empirical Fact (1)→ Patenting by new entrants has declined.

PATENTING SHARE BY NEW ENTRANTS

.04

.05

.06

.07

.08

.09

Entra

nt S

hare

1980 1990 2000 2010year

Source: Akcigit and Ates (2019)———————————————


Empirical Fact (2)→ Patenting concentration has increased.

TOP-1% PATENTING SHARE

.35

.4.4

5.5

Shar

e of

Top

-1%

Inno

vatin

g Fi

rms

1980 1990 2000 2010year



Empirical Fact (3)→ Patents are bought by the largest firms.

SHARE OF TOP-1% BUYERS OVER TIME

.3.3

5.4

.45

.5.5

5Sh

are

of T

op-1

% B

uyer

Firm

s

1980 1990 2000 2010year



Back to Empirical Trends...

90-10 GROWTH RATE DIFFERENCE BY SECTOR

38

Figure 5: 90-10 Differential for Public, Private, and High Tech Firms

Note: Y axis does not begin at zero. The 90-10 differential is the difference between the 90th and the 10th percentile of the employment-weighted distribution of firm employment growth rates. Data are HP trends using parameter set to 100. High tech is defined as in Hecker (2005) (see Table A.1 in the web appendix). Data include all firms (new entrants, exiters, and continuers). Author calculations from Compustat and the Longitudinal Business Database.

20

40

50

60

70

80

90

All firms

High Tech

Source: Decker, Haltiwanger, Jarmin, and Miranda (2016b)


Empirical Fact (4)→ Patents have become less exploratory.

FRACTION OF SELF CITATIONS

.15

.2.2

5.3

.35

.4Sh

are

of S

elf C

itatio

ns

1980 1990 2000 2010year




FRACTION OF SELF CITATIONS

.15

.2.2

5.3

.35

.4Sh

are

of S

elf C

itatio

ns

1980 1990 2000 2010year




AVERAGE CLAIM LENGTH OVER TIME

140

150

160

170

180

Mea

n C

laim

Len

gth

1980 1990 2000 2010year



Paper #2Figure 1: Buyer Power Across Sectors

46

Morlacco (2018)

Interesting finding: Substantial buyer power in France.It correlates with the size and productivity of the firm.


Thank You...

[email protected]


Innovation Types

quality, q

productline, j

Leader

Follower

Neck&neck

line 1 line 2 line 3 line 4 line 5

δ

(1− φ) x−i

φx−i

entrants

φ̃x̃

(1− φ̃) x̃

exit

Figure: Evolution of product lines


Leader Innovation

quality, q

productline, jline 1 line 2 line 3 line 4 line 5

xi



Follower Innovation: Slow Catch-up

quality, q


(1− φ) x−i



Knowledge Diffusion

quality, q


δ



Evaluation of Each Shock

contributioni =X42010 −X

4\i2010

X42010 −X41980.

Channel iLower

corporatetax

HigherR&D

subsidies

Higherentrycost

Lowerknowledgediffusion

Entry -8.2% -0.4% 17.9% 50.6%Labor -9.0% -7.7% 3.6% 78.7%Markup 7.6% 10.8% 3.6% 84.2%Profit -9.0% -7.7% 3.6% 78.7%Concentration 4.3% 7.1% -7.2% 96.2%Young -13.2% -7.7% -1.3% 71.2%Prod. gap 7.2% 10.5% 3.5% 83.8%Reallocation -6.9% 0.2% 13.6% 48.5%Dispersion 32.7% 29.2% -44.6% 136%Average 0.6% 3.8% -0.8% 80.9%


Evaluation of Each Shock

contributioni =X42010 −X

4\i2010

X42010 −X41980.

Channel iLower

corporatetax, τ

HigherR&D

subsidies, s

Higherentrycost, c

Lowerknowledgediffusion, δ

Entry -8.2% -0.4% 17.9% 50.6%Labor -9.0% -7.7% 3.6% 78.7%Markup 7.6% 10.8% 3.6% 84.2%Profit -9.0% -7.7% 3.6% 78.7%Concentration 4.3% 7.1% -7.2% 96.2%Young -13.2% -7.7% -1.3% 71.2%Prod. gap 7.2% 10.5% 3.5% 83.8%Reallocation -6.9% 0.2% 13.6% 48.5%Dispersion 32.7% 29.2% -44.6% 136%Average 0.6% 3.8% -0.8% 80.9%


References:ACEMOGLU, D., AND U. AKCIGIT (2012): “Intellectual Property Rights Policy,

Competition and Innovation,” Journal of the European Economic Association, 10(1),1–42.

AGHION, P., N. BLOOM, R. BLUNDELL, R. GRIFFITH, AND P. HOWITT (2005):“Competition and Innovation: An Inverted-U Relationship,” Quarterly Journal ofEconomics, 120(2), 701–728.

AKCIGIT, U., AND S. T. ATES (2018): “Declining Business Dynamism: Some Lessonsfrom Modern Growth Theory and Patent Data,” University of Chicago mimeo.

(2019): “What Happened to U.S. Business Dynamism?,” University of Chicagomimeo.

AKCIGIT, U., S. T. ATES, AND G. IMPULLITTI (2018): “Innovation and Trade Policy ina Globalized World,” National Bureau of Economic Research Working Paper 24543.

ANDREWS, D., C. CRISCUOLO, AND P. N. GAL (2016): “The Best versus the Rest: TheGlobal Productivity Slowdown, Divergence across Firms and the Role of PublicPolicy,” OECD Productivity Working Paper 5/2016.

AUTOR, D., D. DORN, L. F. KATZ, C. PATTERSON, AND J. VAN REENEN (2017): “TheFall of the Labor Share and the Rise of Superstar Firms,” National Bureau ofEconomic Research Working Paper 23396.

DE LOECKER, J., AND J. EECKHOUT (2017): “The Rise of Market Power and TheMacroeconomic Implications,” National Bureau of Economic Research WorkingPaper 23687.


DECKER, R. A., J. HALTIWANGER, R. S. JARMIN, AND J. MIRANDA (2016a):“Declining Business Dynamism: What We Know and the Way Forward,” AmericanEconomic Review: Papers & Proceedings, 106(5), 203–07.

(2016b): “Where Has All The Skewness Gone? The Decline in High-growth(Young) Firms in The US,” European Economic Review, 86, 4–23.

KARABARBOUNIS, L., AND B. NEIMAN (2013): “The Global Decline of the LaborShare,” Quarterly Journal of Economics, 129(1), 61–103.


Documents

Session 3: One-country Evidence - European Investment Bank...2007 2010 2013 2016 domestic exporter exporter and importer importer Having in mind that the Polish rm have bene ted from