Heterogeneous Firm Model Research Articles

Human capital inflow, firm innovation and patent mix

In this article, a theoretical model of heterogeneous firms is built that emphasizes how human capital inflow (HCI) affects a firm’s innovation. The model shows that when HCI increases, the cost of a firm’s innovation decreases, the relative innovation efficiency gap between any two patents decreases, and the quality of each existing patent increases, which makes firms produce more patents, improve the quality of innovation and reduce the skewness of the patent mix. Empirical tests with data from Chinese Listed Companies are consistent with the predictions of the theoretical model, and robust to various estimation specifications. Moreover, the impacts of HCI vary across different types of patents, that is, both the quantity and quality of invention patents increase with HCI, while the skewness of the patent mix decreases. However, there is no evidence that HCI influences utility model patents.

The Impact of Different Types of Borrowing Constraints in a Heterogeneous Firm Model

The Impact of Different Types of Borrowing Constraints in a Heterogeneous Firm Model

The Role of Intra-National Trade in Trade Theory

This paper explores the implications arising from the heterogeneous firm model for a theory of trade in which intranational trade is an intrinsic part, and international trade is its extension. Due to market competition, intranational trade dynamically leads to an increase in productivity heterogeneity across firms, which strengthens market selection and makes allocation more efficient. It also strengthens comparative advantage, and thus stimulates international trade.

How costly is exporting? An empirical assessment of trade model with heterogeneous firms

Foreign market access cost, explored by Melitz (2003) in the heterogeneous firm model of international trade, is one of the essential assumptions that ensure a nice fit of model results to stylized facts. Selection of more productive firms into exporters is guaranteed by the ex‐ cess of export fixed costs, adjusted for variable trade costs, over fixed costs of production. While there is empirical evidence on export cost structure at the level of firms, there has been no evaluation of the overall size of these costs. This paper aims at filling the gap. First, the model of Melitz (2003) is extended to allow asymmetries between trading countries. Then, the parametric relation between aggregated economic parameters is derived, which allows estimating the ratio of fixed costs. Then the relation is estimated empirically for the universe of Russian firms from 2014 to 2019, and results indicate that the foreign market access costs are comparable to the fixed cost of production in this setting. These findings provide evidence of the empirical relevance of the partitioning condition.

Firm heterogeneity, variable markups, and multinational production: A review from trade policy perspective

This paper surveys the main ingredients and results of heterogeneous firms trade policy literature that has been developing since the early 2000s. First, I present the stylized facts regarding firm heterogeneity, firm-level markups, and multinational production's (MP) global structure. I then survey the trade policy papers that build on the workhorse model of firm heterogeneity. Third, I summarize the recent development of theoretical approaches of modeling the firm-level markups and its trade policy implication. Fourth, I discuss the theoretical frameworks that incorporate MP into heterogeneous firms' framework and their trade policy implication. Finally, I discuss directions for future research and offer suggestions for further readings.

Venting Out: Exports during a Domestic Slump

We study the relationship between domestic-demand shocks and exports using data for Spanish manufacturing firms in 2002–2013. Exploiting plausibly exogenous geographical variation caused by the Great Recession, we find that firms whose domestic sales declined by more experienced a larger increase in export flows, controlling for firms’ supply determinants. This result illustrates the capacity of export markets to counteract the negative impact of local demand shocks. By structurally estimating a heterogeneous-firm model of exporting with nonconstant marginal costs of production, we conclude that these firm-level responses accounted for half of the spectacular increase in Spanish goods exports over the period 2009–2013. (JEL D22, E32, F14, L60)

Intellectual property rights protection and quality upgrading: Evidence from China

This study analyzes the effect of domestic and foreign intellectual property rights (IPR) protection on quality upgrading. We build a tractable model of heterogeneous firms, endogenous innovation scale, and endogenous quality choice. The model shows that IPR protection affects firms’ export quality through two opposing channels: the innovation and threshold effects, which promote and inhibit quality upgrading, respectively. We examine the overall effect of these channels using firm-level data from China across 2000–2007. We find that: (ⅰ) both domestic and foreign IPR protection positively affect export quality upgrading, so innovation effect is dominant; (ⅱ) the impact of domestic IPR protection is greater than that of foreign IPR protection; and (iii) various methods, such as generalized method of moments and difference in differences, are used to test the conclusions of this study, indicating robust results.

Trade and Management

Abstract We study how management practices shape export performance using matched production-trade-management data for Chinese and American firms and a randomized control trial in India. Better-managed firms are more likely to export, sell more products to more destinations, and earn higher export revenues and profits. They export higher-quality products at higher prices and lower quality-adjusted prices. They import a wider range of inputs and inputs of higher quality and price, from more advanced countries. We rationalize these patterns with a heterogeneous-firm model in which effective management improves performance by raising production efficiency and quality capacity.

International trade, skill premium and endogenous labor division: The case of Mexico

Why trade liberalizations increase the skill premium? To explain this empirical evidence that is in contrast with the conventional theory of Heckscher-Ohlin, I build up a general equilibrium micro-founded heterogeneous-firm model of international trade where firms make decisions on their division of labor, and firms’ skill-intensities are endogenously determined. I show why the exporters are generally more productive and skill intensive and how trade cost reductions induce more productive firms to choose a higher degree of labor specialization, become more skill intensive and start to export. I further demonstrate how such internal horizontal organizational changes, after a trade cost reduction, can directly increase aggregate skill intensity and the relative demand for skilled workers, resulting in higher skill premium in a general equilibrium setting. Lastly, I calibrate this model to the Mexican data to quantify the rise in the skill premium in the period of its trade liberalization 1985~1993.

News Uncertainty in Brexit United Kingdom

After the Brexit referendum, the behavior of the UK economy defied widespread expectations, as it did not exhibit a V-shaped recession but a slow decline in production. We show that this pattern of propagation arises when uncertainty is about future, rather than current, fundamentals and if the expected duration of uncertainty is sufficiently long. We reach this conclusion within the confines of a heterogeneous firms model featuring news uncertainty rather than conventional uncertainty shocks. In the quantitative analysis, uncertainty is informed by firm-level probability distributions on the expected effect of Brexit on sales. (JEL E22, E23, E24, E32, F15)

FIRM DYNAMICS WITH FRICTIONAL PRODUCT AND LABOR MARKETS

AbstractWe analyze the joint dynamics of prices, productivity, and employment across firms, building a dynamic equilibrium model of heterogeneous firms who compete for workers and customers in frictional labor and product markets. Using panel data on prices and output for German manufacturing firms, the model is calibrated to evaluate the quantitative contributions of productivity and demand for the labor market. Product market frictions decisively dampen the firms' employment adjustments to productivity shocks. We further analyze the impact of aggregate shocks to the first and second moments of productivity and demand and relate them to business‐cycle features in our data.

Credit constraint and firm’s export mode choice

Abstract How do firms’ credit constraint affect their export mode choices between direct exporting and indirect exporting through intermediaries? This study explores this issue in a heterogeneous firm model where firms differ not only in productivity but also in credit levels. Our model predicts that more productive and financially less constrained firms tend to choose the more advanced export mode and that for the cutoff firms, there is an overall inverse relation between credit and productivity with diminishing marginal rate of substitution. These theoretical predictions are borne out in a large cross-country firm-level dataset over the period 2002–2012.

Resource Misallocation Among Listed Firms in China: The Evolving Role of State-Owned Enterprises

We document that publicly listed Chinese state-owned enterprises (SOEs) are less productive and profitable than publicly listed firms in which the state has no ownership stake. In particular, Chinese listed SOEs are more capital intensive and have a lower average product of capital than non-SOEs. These productivity differences increased between 2002 and 2009, and remain sizeable in 2019. Using a heterogeneous firm model of resource misallocation, we find that there are large potential productivity gains from reforms which could equalize the marginal products of listed SOEs and listed non-SOEs.

The Geographical Scope of Multinational Firms and Heterogeneity

This paper offers an empirical assessment of the geographical scope of multinational activity at the world level. With this objective, we estimate scope elasticities, which is the relationship between the productivity of the parent firm and the probability of operating abroad in different markets through subsidiaries with the same main activity. Elasticities are estimated for a baseline cross-section of 35 home countries that represent more than 70% of total outward FDI investment at the world level. At the aggregate level, the results indicate quite consistently, through various estimation methods, that a 10% increase in the productivity of the parent firm increases the probability in a range between 0.8–1.0%. Elasticities for manufacturing more than double the elasticities for the service sector. The paper also explores the heterogeneity of scope elasticities across home countries and sectors. This heterogeneity is related to differences across bilateral home-host country characteristics such as the size of the potential host market, bilateral distance and other factors such as institutional quality of host countries and cultural closeness. The signs attached to some of these factors are in general consistent with the predictions of models of firm heterogeneity and FDI activity.

Young Firms and Monetary Policy Transmission

We investigate the role of business dynamism in the transmission of monetary policy by exploit- ing the variation in firm demographics across U.S. states. Using local projections, we find that a larger fraction of young firms significantly mutes the effects of monetary policy on the labor market and personal income over the medium term. The firm entry rate and the employment share of young firms are key factors underpinning these results, which are robust to a battery of robustness tests. We develop a heterogeneous-firm model with age-dependent financial frictions that rationalizes the empirical evidence.

Global value chains, firms, and wage inequality: Evidence from China

How does participating or moving to more upstream in the global value chains (GVCs) affect the premium paid to skilled compared to unskilled labor within firms? In this paper, we develop a model of heterogeneous firms with intermediate trade and two skill inputs, in which we apply the fair wage hypothesis to predict the wage premium changes according to firms' GVCs activities. The model predicts that firms' backward GVC participation, as measured by the share of foreign value-added content in exports (FVAR), has an ambiguous impact on wage inequality of skills, which depends on the relative importance of “FVAR-labor substitution effect” and “FVAR-profit effect.” However, moving to upstream sectors in GVCs, as measured by the export varieties' upstreamness (or average distance from final use), raises a firm's wage premium. Using detailed Chinese firm-level data from 2000 to 2006, we develop a Mincer-type empirical model to study the wage premium changes associated with FVAR and upstreamness. We find robust empirical evidence that the rise of wage inequality in China mainly arises from moving to more upstream sectors rather than changing GVC participation.

Aggregate dynamics and microeconomic heterogeneity: the role of vintage technology

We study how the timing of technology adoption through capital accumulation shapes firm-level productivity dynamics and quantify its aggregate implications in a model of heterogeneous firms. Using data on the census of incorporated Italian firms and exploiting the lumpiness of capital accumulation, we document that large investment episodes lead to productivity gains at the firm and sectoral level due to vintage effects. In a general equilibrium model of firm heterogeneity, we find that the presence of vintage technology constitutes a powerful microeconomic-based amplification mechanism of aggregate shocks relative to a benchmark real business cycle model.

Risky Financial Collateral, Firm Heterogeneity, and the Impact of Eligibility Requirements

This paper studies how endogenous firm responses amplify the impact of central bank eligibility requirements on collateral supply and quality. Amplification arises, because banks increase demand for eligible bonds and firms increase bond issuance and default risk in response. We analyze these effects in a heterogeneous firm model with endogenous default and eligibility premia. Using a calibration to European data, we find that, in normal times, firm responses account for 30% of the total increase in collateral supply and 15% of the decrease in collateral quality. If fundamental risk is high, these numbers decline to 15% and 11%, respectively.

Heterogeneous labour market response to monetary policy: small versus large firms

We study the effects of monetary policy shocks on the growth rates of hiring, employment and earnings of new hires across firms of different sizes. We find that contractionary and expansionary monetary policy shocks have different effects on hiring and employment growth for small and large firms. Relative to large firms, small firms are less responsive to contractionary monetary policy shocks while they are more responsive to expansionary shocks. We also find that, as a consequence of monetary policy shocks, the earnings of new hires changes, and this wage effect depends on the sign of the shock and the size of the firms. We use a heterogeneous firm model with a working capital constraint, an upward sloping marginal cost curve and a financial accelerator effect, and augment it with the wage effect. We find that our empirical results are consistent with the model as long as the combined effect due to varying steepness of the marginal cost curve and the wage effect is stronger than the financial accelerator channel.

Trade-Policy Dynamics: Evidence from 60 Years of U.S.-China Trade

We study the growth of Chinese imports into the United States from autarky during 1950-1970 to about 15 percent of overall imports in 2008, taking advantage of the rich heterogeneity in trade policy and trade growth across products during this period. Central to our analysis is an accounting for the dynamics of trade, trade policy, and trade-policy expectations. We isolate the lagged effects of past reforms and the current effects of uncertainty about future reforms. We build a multi-industry, heterogeneous-firm model with a dynamic export participation decision to estimate a path of trade-policy expectations. We find that being granted Normal Trade Relations (NTR) status in 1980 was largely a surprise and that, in the early stages, this reform had a high probability of being reversed. The likelihood of reversal dropped considerably during the mid 1980s, and, despite China's accession to the World Trade Organization (WTO) in 2001, changed little throughout the late 1990s and early 2000s. Thus, although uncertainty depressed trade substantially following the 1980 liberalization, much of the trade growth that followed China's WTO accession was a delayed response to previous reforms rather than a response to declining uncertainty.