Intra-industry Differences Research Articles

A firm-level perspective on windows of opportunity

The concept of windows of opportunity (WoO) has been put forward as a perspective for understanding industrial catching up in developing and emerging economies. A related, but separate literature (capability literature) has focused on the learning processes of developing country firms as they build technological capabilities. In this paper, we examine the insights that can be drawn from the capability literature in order to provide a more nuanced and micro-level perspective on WoO. Through a review of the capability literature, we highlight the intra-industry differences and capability-building trajectories of individual firms as they respond to technological, demand, and institutional WoO. The paper underscores the importance of devoting attention to firm-level differences to understand how these may influence firms' responses to WoO.

“And we would have the field”: U.S. Steel and American trade policy, 1908–1912

AbstractRecent surveys revealed few producers in an export sector participate in trade. Economists explained this result by relaxing their assumption about firms’ operations, to produce a novel observation: Trade liberalization disproportionately benefits the most efficient producers in the sector, while potentially harming the least efficient. Political scientists have begun exploring the consequences of this variation, especially in lobbying. This article explores whether the impact of this finer-grained description of interests can be observed in the later stages of our demand-driven models of the politics of trade. I focus on one case with characteristics favorable to observing intra-industry differences: the American steel industry in Taft's presidency. A trade-based cleavage inside the sector determined firms’ interests. Demands shaped policy, as observed in three pieces of legislation: the Payne-Aldrich Act, reciprocity with Canada, and the 1912 tariff. The first liberalized trade in steel, intensifying competition in the industry. The second promised to do the same, with a similar impact. The third had no effect, however, because Taft vetoed the bill. This case illustrates intra-industry firm heterogeneity can provide additional accuracy, revealing a previously undiscovered cleavage. Nonetheless, preferences alone did not determine policy.

Knowledge spillovers, absorptive capacity and total factor productivity in China’s manufacturing firms

Applying the stochastic frontier framework, this study explores the diffusion and absorption of technological knowledge in China’s manufacturing firms, based on a panel of more than 10,000 local and foreign-invested firms over the period 1998–2001. Our empirical approach allows us to distinguish between technological progress (TP) and technical efficiency (TE) in analysing whether R&D, exports and the presence of foreign direct investment simultaneously enhance TP through knowledge spillovers in a single framework and whether different types of domestic absorptive capacity moderate external knowledge spillovers in relation to TE. The results show that there are positive inter-industry productivity spillovers from R&D and foreign presence, whereas evidence of intra-industry productivity spillovers from FDI to Chinese firms is less robust. We find evidence that absorptive capacity is one of the key determinants to quantitatively explain intra-industry differences in productivity of local Chinese firms. The findings have important policy implications.

Turbulence underneath the big calm? The micro-evidence behind Italian productivity dynamics

Italy ranked last in terms of manufacturing productivity growth according to OECD estimates over the last decade, with a flat, if not declining, trend. In this work we investigate the underlying firm-level dynamics of enterprises on the basis of a database developed by the Italian Statistical Office (ISTAT) covering the period 1989–2004 and containing information on more than 100,000 firms. Over this period not only have the indicators of the central tendency of the distribution of labor productivity not significantly changed, but also the whole sectoral distributions have remained relatively stable over time, with their support at least not shrinking, or even possibly widening, over time. This is even more surprising if one takes into consideration the “Euro” shock that occurred during the period investigated. On the contrary, we observe that inter-decile differences in productivity have been increasing. Further, heterogeneous firms’ characteristics (i.e. export activity and innovation) seem to have contributed to boosting such intra-industry differences. Given such wide heterogeneities we resort to quantile regressions to identify the impact of a set of regressors at different levels of the conditional distribution of labor productivity. One phenomenon that we observe is what we call a tendency toward “neo-dualism” involving the co-existence of a small group of dynamic firms with a bigger ensemble of much less technologically progressive ones.

Entry and Schumpeterian profits

A large empirical literature has documented differences in Schumpeterian profits, both among firms in single industries and between firms in different industries. Theorists have proposed various institutional and strategic factors to account for such differences but have had relatively little to say about the manner in which technology affects entry and profits. In this paper I present a model in which persistent intraindustry differences in firm profitability arise as the outcomes of learning and imitation, and interindustry differences in the persistence of above normal profits arise solely from production being more technologically complex in some industries than in others.

Business Strategy and Firm Reorganization under Changing Market Conditions

This study is framed against the increasingly stringent environmental demands on the pulp and paper industry since the late-1980s to reduce water and air pollution, and the global economic slowdown of the early-1990s. The primary focus of this paper is an observation-based analysis conducted by visiting selected paper mills in Finland, the U.S., Germany and Sweden. I find interesting differences and similarities in the firms’ strategies in terms of how they responded to these changes in market conditions. Some of the observed differences lie in their focus on achieving (incremental) cost-efficiency gains from better management of the production processes, inventories, supply-chain, product distribution, and timing of modernization investments, including ICT. The second part of the paper presents evidence on firms’ productivity paths, and the heterogeneity in productivity among relatively similar firms. I also present selected evidence of these firms’ investments in specific areas and how they affected their productivity. The observation of important intra-industry differences across relatively similar firms lends credence to the insights provided by Denrell, Fang and Winter (2003) and Zott (2003), among others. The findings have implications for the study of organizational behavior and business strategies employed by firms to improve their performance and productivity under changing market conditions. We end with some comments on how to assess innovative activity in traditional industries such as pulp and paper.

Intra-industry differences in vertical integration, heterogeneous costs and pricing: the case of web hosting

In many differentiated product industries, both traditional and “new economy” activities, vertically integrated firms also supply inputs to apparent rivals in the downstream business. This generates heterogeneity between low- and high-sunk cost suppliers with implications for entry and competitive conduct. The web hosting market is typical with primary suppliers operating alongside resellers who rent server space from them. We explore the impact of competition in US hosting using a unique dataset covering 15,000 packages offered by 3,500 firms. The results suggest price is sensitive to competitor clustering in quality space; an outcome consistent with easy entry for resellers with ultra-low fixed costs.

Explaining Intraindustry Differences in the Extent of Vertical Integration

The central purpose of this paper is to examine firms' vertical integration decisions as a consequence of strategic choices within an explicit market environment. I show that a unique equilibrium number of unintegrated downstream firms exists when the intermediate-good market is imperfectly competitive and nonintegration leads to savings in fixed costs. The outcome may be one in which some firms produce the intermediate good internally while others do not, despite the fact that all firms have identical ex ante opportunity sets. Thus, my results provide an explanation for intraindustry differences in the vertical organization of firms.

The Spatial Configuration of the Firm and the Management of Sunk Costs

In this paper we explain why the modern corporation may persist with decentralised system plants differentiated by the vintage of capital and the style of management. Here, our goal is to show how and why firms are, at once, structured by the inherited configuration of capital, and reproduce differentiation within and without the corporation. To do so, we use concepts and principles drawn from modern financial theory to show that a spatially differentiated configuration of production may have advantages for the firm in terms of the risk-adjusted flow of revenue, strategic options in relation to actual and potential competitors, and the management of sunk costs. Our argument is focused upon the modern corporation, characterised by a separation between ownership and control as well as a dependence upon internal stakeholders for the realisation of planned revenue and output targets. We argue that our framework can help theorists account for the persistence of inter-firm and intra-industry differences in capital profiles, despite a common presumption in favour of convergence around a simple, most efficient industry standard. While the paper is an exercise in theory, it is based upon our previously published studies of corporate restructuring in manufacturing and retail industries in the United States and the United Kingdom.

An analysis of intra-industry differences in the effect of regulation: The case of deposit rate ceilings

This study examines the impact of deposit rate ceiling changes on the market value of commercial banks and stock savings and loan associations. Statistically significant increases in market value are found on announcement of the removal of ceilings on large denomination certificates of deposit. In contrast, retail commercial banks and savings and loans experienced declines in value on announcement of the elimination or relaxation of deposit rate ceilings on small denomination consumer accounts. In addition, for all events analyzed, significant differences were found in the effect of ceiling changes on the market value of wholesale and retail commercial banks.

The market dynamics of technological substitutions

Models are discussed which relate to the prediction of the rate of growth of markets which are created when a new product based on a new technology is substituted for an old product. A methodology is described which can be used to forecast the dynamics of the substitution process. Forecasting procedures applicable to cases where historical substitution data are available are discussed. Other procedures which can be used in the absence of historical data are also described. Specific examples of the application of both procedures are given. The methodological structure which is developed provides insights into the causes of inter-and intra-industry differences in the dynamics of market growth of new products based on new technology and can be used toestablish criteria useful in evaluating and planning new technology-based products.

Estimates of the Marginal Rate of Time Preference and Average Risk Aversion of Investors in Electric Utility Shares: 1960-66

This paper develops an econometric model of the valuation of electric utility shares. This model, based upon the Sharpe-Lintner capital market theory, yields indirect estimates of the marginal rate of time preference and average aversion of investors in electric utility shares during the period 1960-66. In general, the empirical findings are consistent with the Sharpe-Lintner positive theory of the valuation of assets. Investors are found to be averse, and the relationship between required return and standard deviation is found to be approximately linear within the range of the sample. From a normative perspective, these estimates of the marginal rate of time preference and aversion are shown to yield individual firm cost of capital estimates. In a prior study of the cost of capital to the electric utility industry, Miller and Modigliani assumed that electric utilities were homogeneous with respect to operating risk. The approach employed in the present study takes explicit cognizance of intra-industry differences in operating risk. That is, each firm is considered to be in a unique risk class, and hence to have a unique marginal cost of equity capital.