Firm Heterogeneity Research Articles

Believe me when I say green! Heterogeneous expectations and climate policy uncertainty

We develop a dynamic model where heterogeneous firms take investment decisions depending on their beliefs on future carbon prices. A policy-maker announces a forward-looking carbon price schedule but can decide to default on its plans if perceived transition risks are high. We show that weak policy commitment, especially when combined with ambitious mitigation announcements, can trap the economy into a vicious circle of credibility loss, carbon-intensive investments and increasing risk perceptions, ultimately leading to a failure of the transition. The presence of behavioural frictions and heterogeneity - both in capital investment choices and in the assessment of the policy-maker's credibility - has strong non-linear effects on the transition dynamics and the emergence of ‘high-carbon traps’. We identify analytical conditions leading to a successful transition and provide a numerical application for the EU economy.

Optimal emission regulation under market uncertainty

AbstractGovernment regulations on emission control can be broadly divided into two categories: price instruments and quantity instruments. In this paper, we develop a stylized model to compare the two instruments in the presence of market uncertainty. We find that when the emission intensity (i.e., emissions per unit of production) and the market uncertainty are both high or low, the expected social welfare under the price instruments will be higher; otherwise, the performance of the quantity instruments is comparatively better. The results are robust when incorporating firm competition and national/regional pollution damage. Afterward, we demonstrate that the government's quick‐response capability or a hybrid of the price and quantity instruments can improve the expected social welfare, especially for high‐emitting industries when the market uncertainty is intermediate. Lastly, for heterogeneous firms, we find that allowing permit trading in the quantity instrument may not be beneficial when pollution from each firm is more likely to have regional effects.

Plant-level adjustments to imports and exports at the extensive margin

This paper presents an empirical analysis of plant level responses to the China trade shock based upon a DSGE framework with heterogeneous firms. The empirical analysis shows that soaring imports from China are associated with a higher probability of plant closure. By contrast, firms in export oriented industries are less likely to exit. We rationalize these findings by several counter-factual experiments based upon a DSGE framework. Imports always raise the exit rate but the export-effect is ambiguous. More exports fuel competition among domestic rivals associated with more exits. However, this competition effect disappears when the share of exporters is extremely high. The effects of imports and exports on firm entry are close to zero in both theory and empircs. We also introduce a novel productivity shock channel. Additional export sales better protect firms from other shocks. We show this by introducing negative productivity shocks into the model.

Demand Uncertainty, Selection, and Trade

This paper examines the role of uncertainty on elasticities of trade flows with respect to variable trade costs in a canonical model of trade with monopolistic competition and heterogeneous firms. We identify two channels through which uncertainty impacts trade: through export participation thresholds (the selection effect) and the distribution of shocks governing export selection (the dispersion effect). While the selection effect dampens trade elasticities under uncertainty, the dispersion effect is ambiguous. We develop a methodology for using customs firm-level data to quantify trade elasticities under uncertainty, and the magnitude of each of the two channels through which uncertainty impacts trade. We find that uncertainty amplifies trade elasticities, on average, indicating that the dispersion effect of idiosyncratic firm-level shocks dominates -- though the effect is heterogeneous across industries. The overall magnitude of the endogenous selection mechanism on trade elasticities is small, indicating that the main drivers of trade in this class of trade models are overwhelmingly incumbent firms.

International business and organizational innovation: an agenda for future research

PurposeOrganizational innovation (OI) is important for multinational enterprises to adapt to changes in their broader technological and market environments. Despite its power to transform organizations, OI has remained at the periphery of international business (IB) scholarship. The purpose of this paper is that IB is particularly equipped to further the understanding of OI. IB studies place significant value on “context” and how the context in which the firm operates can enable or hinder the evolution of internal routines and practices, leading (or not) to OI.Design/methodology/approachThe authors identify the key challenges which have contributed to the seemingly less important role of OI in IB, notable among them being the ambiguity of concepts associated with OI across different research fields. The authors advance the research agenda by offering a comprehensive definition of OI. The authors then put forward an integrative framework where the authors discuss the importance, and contribution, of IB to OI and vice versa.FindingsThe literature is characterized by terminological and empirical ambiguity. Some management scholars have coined the term “management innovation” with a clear element of invention and state-of-the-art attached to it. Others have referred to “organizational innovation,” when exploring incremental and targeted changes to extant team- and firm-level practices. In turn, IB scholars developed their own terminology, often (implicitly) referring to technological innovations as “asset-type firm-specific advantages” (FSAs) and associating OI with “transaction-type” FSAs.Originality/valueThe authors offer a new definition for OI – to address the challenges associated with terminological ambiguity. The authors put forward an integrative framework of OI in IB. The proposed framework of OI emphasizes the wider organizational context in which OI takes place, i.e. firm heterogeneity; and the broader external (IB) context of OI.

Monetary Policy and Welfare with Heterogeneous Firms and Endogenous Entry

AbstractThis paper studies monetary policy and welfare in a sticky wage New Keynesian model with heterogeneous firms and endogenously variable markups. We show that stabilizing nominal wages is optimal only when product creation is based on an instantaneous zero‐profit condition and when the aggregate markup is constant. A constant markup requires strong selection effects generated by a Pareto firm‐level productivity distribution. When product creation is based on a dynamic zero‐profit condition optimal monetary policy accounts for the distribution of firms and the welfare loss from stabilizing nominal wages is between and 0.2% of steady‐state consumption.

The Heterogeneous Impact of Market Size on Innovation: Evidence from French Firm-Level Exports

Abstract We analyze how demand conditions faced by a firm in its export markets affect its innovation decisions. We exploit exogenous firm-level export demand shocks and find that firms respond by patenting more; furthermore, this response is driven by the subset of initially more productive firms. The patent response arises two to five years after the shock, highlighting the time required to innovate. In contrast, the demand shock raises contemporaneous sales and employment for all firms regardless of their productivity. This skewed innovation response to common demand shocks arises naturally from a model of endogenous innovation and competition with firm heterogeneity.

The geography of acquisitions and greenfield investments: Firm heterogeneity and regional institutional conditions

AbstractThis paper investigates how institutional conditions at national and regional levels shape the decisions of Multinational Enterprises (MNEs) to invest abroad by means of either acquisitions or greenfield investments. The empirical analysis covers all foreign direct investment (FDI) projects in the European Union by the largest MNEs in the world to study alternative choices by the same firm and account for firm‐level characteristics in investment decisions. The empirical results show that—other things being equal—regions with stronger investment eco‐systems are more likely to attract acquisitions, while greenfield investments are more likely in regions with comparatively weaker systemic conditions. Howerver, the regional quality of institutions makes a fundamental difference to the nature of the investment projects attracted by regions: those with high quality of government can attract greenfield investments undertaken by the most productive MNEs. By improving their quality of government, local, and regional policy makers can attract higher quality greenfield investment projects to their constituencies, potentially breaking the vicious circle between low productivity areas and low productivity FDI.

The Influence of CEO's Overseas Background on Firms' Green Technology Innovation Based on the Moderating Effect of the Nature of Firms' Property Rights

Based on China's current emphasis on green development and the bottleneck of green innovation faced by enterprises in practice, this paper focuses on analyzing the role of executives' overseas experience in corporate green innovation. Utilizing data from A-share listed companies in China from 2008 to 2022, this study finds that CEOs with overseas experience significantly promote corporate green technology innovation. The study further reveals the intrinsic mechanisms by which CEOs with overseas experience promote firms' green technological innovation, including the positive impact of their internationalized vision, environmental protection concepts and long-term planning on firms' innovation decisions. Meanwhile, the study also takes into account the heterogeneity of firms, and finds that the overseas experience of CEOs in private firms has a more significant effect on green technological innovation than that of state-owned firms. Through empirical research, this paper clarifies the influence mechanism and boundary conditions of CEOs with overseas experience on corporate green technology innovation, which provides useful insights for corporate management practice and policy making.

The location choice of Chinese investment in the United States: Industrial agglomeration, ethnic networks and firm heterogeneity

The location choice of Chinese investment in the United States: Industrial agglomeration, ethnic networks and firm heterogeneity

Who Benefits from State Corporate Tax Cuts? A Local Labor Market Approach with Heterogeneous Firms: Further Results

This paper estimates state corporate tax incidence using new data and methods for estimating the effects on profits. Extending Suarez Serrato and Zidar (2016), we develop two identification approaches that use the effects on incumbent firm labor demand and local productivity. We estimate these effects using data from census, show how they identify parameters, and provide incidence estimates using reduced-form and structural approaches. Across these approaches, we find that owners bear a substantial portion of incidence. Our central estimate is that firm owners bear half of the incidence, while workers and landowners bear 25-40 percent and 10-15 percent, respectively.

A Theory of Monopolistic Competition with Horizontally Heterogeneous Consumers

Our novel approach to modeling monopolistic competition with heterogeneous firms and consumers involves spatial product differentiation, in either a geographical space or a space of characteristics. In addition to price, each firm chooses location in space. We formulate conditions for positive sorting—more-productive firms serve larger market segments and face tougher competition—and for existence and uniqueness of equilibrium. To quantify the role of sorting, we calibrate the model using haircut market data and perform counterfactual analysis. Inequality in gains among consumers caused by positive market shocks can be substantial: gains for consumers at more-populated locations are three to four times higher. (JEL D11, D24, D43, L13, L84)

The link between organizational choice and global input sourcing under sequential production

AbstractThis article analyzes the ways heterogenous firms procure their inputs in the presence of relationship‐specific investments and incomplete contracts. We first consider a closed economy in which firms decide how to structure their organization. Production is sequential and inputs (upstream and downstream) are sourced in the same order as production. While our closed‐economy setup is analogous to Antràs and Chor (Econometrica, 2013), there are two distinct features: (1) The reward to each supplier is determined through bargaining over the full revenue of the firm (as opposed to marginal contribution of the supplier), and (2) The reward structure combined with our sequential bargaining protocol gives rise to linkages across suppliers. The analysis in Antràs and Chor (Econometrica, 2013) identifies a mechanism in which upstream organizational decisions have spillover effects on downstream suppliers' investment incentives. Thanks to our novel features, we identify another mechanism: the spillover effects of downstream organizational decisions on the investment incentive of upstream suppliers. Next, we consider an open economy in which firms not only make organizational decisions but also determine where to source their inputs. We show that these decisions are connected between sequential production stages such that the sourcing location of the upstream input may affect the organizational choice in the downstream stage. We then examine how within sectoral heterogeneity and variations in industry characteristics influence the relative prevalence of firms that choose to form different organizational structures.

Financing needs, financing environment and over-disclose innovation information

ABSTRACT Innovation information is an important way for external investors to understand a firm’s innovation capability and future value. Using Chinese A-share listed companies from 2011 to 2021, we examine whether financing needs lead firms to over-disclose innovation information (OII) in their annual reports. The findings indicate that firms with higher financing needs tend to OII. Heterogeneity analysis reveals that the facilitating effect of financing needs on OII is more pronounced among non-state-owned, small, and declining firms, suggesting that heterogeneity of firms’ financing environment is an important moderator of financing needs’ influence on corporate OII.

Firm Heterogeneity, Home Market Effect, and Gravity Equation in an Oligopoly

Firm Heterogeneity, Home Market Effect, and Gravity Equation in an Oligopoly

Determinants of corporate green innovation? A configuration analysis based on the TOE framework

ABSTRACT Green innovation (GI) is pivotal for enterprises aiming at green development. However, there is a lack of comprehensive research on the configurations that lead to high-level GI, especially considering the diversity among firms. Leveraging the Technology-Organization-Environment (TOE) framework, this study employs fuzzy-set Qualitative Comparative Analysis (fsQCA) on data from 1,293 listed Chinese enterprises spanning 2010–2021 to uncover the intricate paths towards achieving substantial GI. Our findings reveal distinct pathways for high-tech and non-high-tech enterprises, elucidating the nuanced interplay between internal capabilities and external incentives. Specifically, we identify five configurations for high-level GI in high-tech enterprises, epitomised by a ‘dual-wheel drive’ of government support and digital transformation underpinned by signal theory. In contrast, two configurations are discernible for non-high-tech enterprises, characterised by a synergistic ‘government and senior executive cooperation’ model grounded in resource-based theory. These insights culminate in two propositions regarding GI configuration, advocating for an outcome equivalence perspective. This research represents a pioneering exploration that connects firm heterogeneity with the configuration of internal and external conditions through lenses of ‘structure’ and ‘collaboration,’ offering novel pathways for green innovation across diverse enterprise landscapes.

Theories of market selection

AbstractWe provide a survey of the main mechanisms of market selection used in economics. We categorize existing theories into three broad classes—evolutionary selection, reduced form selection, and rational equilibrium—based on their adopted selection mechanisms. Each paradigm is explored in terms of underlying laws of selection, searching for elements of convergence and divergence in epistemological approaches, hypotheses, and results. The comparison of these paradigms reveals convergences in research directions, particularly in replicating empirical patterns related to firm heterogeneity and acknowledging the role of increasing returns. However, these paradigms diverge in key assumptions and results, including emphasis on model outcomes, sources of increasing returns, mechanisms generating firm heterogeneity, and assumptions regarding firm rationality. The discussion highlights that these differences stem from the epistemological foundations of paradigms. The survey contributes to a nuanced understanding of market selection mechanisms within diverse theoretical frameworks, emphasizing both areas of convergence and divergence among them.

The Role of Inward FDI and Family Firm Heterogeneity on Foreign Location Choice: Evidence from India

The Role of Inward FDI and Family Firm Heterogeneity on Foreign Location Choice: Evidence from India

Trade liberalization, wage inequality, and monetary policy

We build a dynamic model of two countries, two sectors and two factors with firm heterogeneity and price rigidity to analyze the short-run and long-run consequences of trade liberalization and its interaction with monetary policy. We find that price rigidity slows down the reallocation process and might imply temporary falls in real wages for some workers. The stance of monetary policy also has a big impact on real wages and real GDP.

The ABCs of Firm Heterogeneity When Firms Sort into Markets: The Case of Exporters

The ABCs of Firm Heterogeneity When Firms Sort into Markets: The Case of Exporters